Eric Halvorsen – UMAFS

Our guest today is Eric Halvorsen, Certified Financial Planner and MBA from the Utah Medical Association Financial Services or as they’re more commonly known UMAFS. Eric and the UMAFS team offer physician specific financial planning and investment advice. We dive deep with Eric and talk about:

  • Why he likens one’s financial life as a marathon, and why he sees dedication and consistency as crucial to your financial goals and success
  • What the DALBAR Study is and why the findings about emotions and logic are relevant to you in your investment strategy
  • What an investment policy statement is and how that can keep you on track and working towards your investment and financial goals
  • Why UMAFS likes Dimensional Funds and how they can be a great tool to help you in your investment goals as well

Josh Mettle: Hello and welcome to the Physician Financial Success Podcast. My name is Josh Mettle, and this is the podcast dedicated to advising physicians how to avoid financial landmines. Today, we’ll be talking with Eric Halvorsen, Certified Financial Planner and MBA from the Utah Medical Association Financial Services or as they’re more commonly known UMAFS. Eric and the UMAFS team offer physician specific financial planning and investment advice, currently managing over $500 million in assets for Utah physicians and their families. Eric, welcome to the show. How are you today?

Eric Halvorsen: I’m doing great. Thanks for asking.

Josh Mettle: Yeah, absolutely. It’s a pleasure to have you on, and if you don’t mind, I’ll just get right into our first question. I’m interested in your background and history with the UMAFS and how you got started down the path of providing financial and investment advice to physicians.

Eric Halvorsen: Thanks for asking that question. My journey thus far has kind of been filled with surprises and unexpected turns. I grew up in a military family, and oddly enough, right out of high school, I thought I’d become an airline pilot. I started a professional pilot program at Utah State and quickly realized that I was partially colorblind. So I thought, “Well, I’m not going to be able to do this very successfully.” So I started, and I thought, “Maybe I’ll do a premed or dental degree with that emphasis on undergraduate degree” and realized that after my first biology class, medicine was not for me. I thought, “Well, how else can I help people with their lives?” I thought I could apply similar types of concepts as far as assisting individuals but rather than their physical health, I’m focusing on their financial health. I started down the path of corporate financing. I have an undergraduate degree in that, worked with a few financial firms until I began specializing working with physicians specifically here at the UMA.

Josh Mettle: That’s a great background. I love it. You’re an accomplished guy. In addition to being a certified financial planner, you also have your MBA, and I notice you are a member of the Salt Lake Estate Planning Council. I wonder how that background and how your time spent in those endeavors help you advise and guide your clients today.

Eric Halvorsen: I think there’s a tendency for individuals to believe that lack of knowledge or formal education as a sign of inability, and so, I never wanted that stigma. I never wanted people to believe that of myself, although I don’t necessarily think that a degree or education makes an individual automatically more capable or qualified, but I wanted to have for myself more education, and I continue to be as informed as possible.

From a young age, I wanted to have a master’s degree of some sort, an advanced degree, and so, that’s why I got the MBA. The CFP is really, for those of you or some of you may not be familiar, the CFP Program is Certified Financial Planner Program in designation, and it applies specifically to financial planning. If you compare those two designations or the degree and the designation, CFP is much more applicable to assisting people with financial planning.

I like to stay involved with professional associations, so I’ve been involved with the estate planning council and the Utah Association of CPAs and the Financial Planning Association to keep my skills sharp and be informed on a variety of financial principles. Partly just for my own knowledge, but I think that someone who has a grasp of a variety of areas at least has enough information to get you to the right person, whether that be a mortgage professional or an attorney, an accountant. We can’t claim to do everything, but we should be able to make introductions to qualified professionals, that why I kind of have an emphasis on those associations.

Josh Mettle: Yeah, and I can attest with my experience with the UMAFS. The group of you are a very well networked group, and it feels like you’ve done an excellent job just as you’re saying to find trusted advisors in all kinds of different fields for the physicians that you serve, so I can attest to that from my experience with you guys so far.

Eric Halvorsen: We appreciate it.

Josh Mettle: Yeah, absolutely. You liken one’s financial life to a marathon. I’ve read a couple of your articles, and I like that analogy. In my mind, I think the hardest part is probably just getting started in that financial marathon, but I’d love to just dig a little deeper in that and find out what you mean by the marathon of one’s financial life.

Eric Halvorsen: I often relate personal finance to a race or marathon. I think it’s something that we can easily associate with. I’m definitely not a marathon runner, but I’ve had friends that do participate in marathons or things of that nature, so I can observe and see the dedication and consistency that are required to finish a race. If you think about ‑ actually another analogy I often use is if you think about with your own children, Josh, I’m sure you’ve shared the story of the tortoise and the hare.

Josh Mettle: Yeah.

Eric Halvorsen: That story has in it ‑ it illustrates a lot of good principles, and often consistency and dedication are the topics that I highlight with my kids. Those are the things that really helped the tortoise win in the end. If you think about a physician’s financial life, there’s a variety of things that they need to focus on. I look at eliminating debt or living within their means or building an emergency fund, investing for retirement or children’s education, intermediate term expenses, and we look at insurance, the need for disability, death or long-term care insurance. There’s a lot of needs, and just like with an athlete who needs coaching and encouragement, we all need financial advice. Often, you hire a financial advisor like UMAFS or you need to rely on experts to make sure that you don’t make any drastic errors and that you stay committed and dedicated in what I term as the marathon of one’s financial life.

Josh Mettle: Yeah, I get that. There’s a lot of twists and a lot of turns, and I know with my own investing, it is nice to have someone to bounce things off sometimes because you can get a little turned around.

Eric Halvorsen: Yeah.

Josh Mettle: The other one of the articles that you wrote that I really enjoyed, you mentioned something about the DALBAR Study and specifically the investor behavioral gap penalty, and I felt like that should have had my picture next to it because I know I have unfortunately fallen victim to that. Maybe you could just take a moment and explain the DALBAR Study to us and how it pertains to the clients that you’ve advised and maybe just touch on the investor behavioral gap penalty I found so interesting.

Eric Halvorsen: Josh, you’re not the only one who’s made that error or feels like that. Anytime we do our own finances, even with my own personal finance, what we notice is emotion becomes a part of the equation when in reality we should remove the emotion from the decision making. There should be more of a financial or statistical analysis as opposed to having an emotional factor.

The DALBAR Study, they did a study called Quantitative Analysis of Investor Behavior. The study has been done for about 20 years. I think they started in – I don’t recall the exact year they began, but it includes 1987 and all these crashes and events over the last 20 years. What happens is the analysis goes through – in fact, I’m going to restate that. It began before then. It cycles through 20-year periods, so 20 years ending in certain periods.

Josh Mettle: Got it.

Eric Halvorsen: The one article that you’re referencing is the years ending from December 2012, and what happens is the firm goes out and analyzes investor returns versus index returns, so they do it for a fixed-income assets, equity assets, and asset allocation kind of models, and what you notice over any extended period of time. Someone could Google this if they have an interest so they can research the DALBAR Study. There would be a variety of articles referencing this.

They reference about behavior penalty. As individual investors, our emotions become factors. Markets dropping, so we naturally begin to sell. Markets climbing, so we feel like our neighbors are making tons of money in the market, I’m going to start buying. Often those activities are too late or not beneficial for our financial success. If one would have just purchased the index during the 20 years ending in 2012, the S&P 500 returned 8.21 percent this average equity investor returns 4.25 percent, so the behavior penalty is the difference between those two numbers. Then, fixed income is actually even worse. This is why having a coach or an investment advisor is beneficial to keep you dedicated, and committed, and consistent and try to talk with you about long-term goals as opposed to the emotion of the month or the day or the week.

Josh Mettle: Basically, emotion equals underperformance. I was thinking about that recently with real estate. I am a big real estate guy, not only because in the profession of mortgages, but personally my family has always kind of invested in real estate. Now today, as we’re recording this in the spring of 2014, there’s beginning to be more confidence and pretty good consumer sentiment, I would say, about real estate certainly improving. But if you look at when your best years would have been to buy, it would have been absolutely when sentiment was the worst in 2010, 2011, and 2012. Those where these massive years where we saw double-digit appreciations in many areas, but that’s where sentiment was the worst.

Now, we’re seeing a lot more interest in buying real estate and a lot more, I can just tell you from my client inquiries, lots more clients are interested in investing in real estate.  And many of them have missed probably the best buying opportunity that we may see in our lifetimes, but I found it just a very interesting correlation to I noticed that in real estate because I get to see it on a first-hand basis. But that correlation over the stocks in a 20-year history and that gap, that investor behavioral gap, is probably true for all asset classes and why you need consultation and professional help.

Eric Halvorsen: Yeah, I totally agree.

Josh Mettle: Hey, in that same article, you mentioned drafting an investment policy statement, which provided confidence in your allocation and likely protects you from being a victim of the investor behavioral gap we were just talking about. Tell us just a little bit more about that investment policy statement and how that works for your client and helps to protect against the investor behavioral gap penalty.

Eric Halvorsen: The interesting piece behind this behavior gap is someone has to evaluate how do I overcome it? What kinds of steps can I take to try to remove the emotion? And so, that’s the reason why we and many firms or individuals will use something like a investment policy statement. Essentially, the statement goes through – identifies time horizon, risk tolerance, liquidity needs, any income needs on the portfolio, tax restrictions, go through and delineate very clearly what are my objectives and goals, and then arrive at a proposed investment allocation.

So, if an individual wanted to write their own investment policy statement, they would go through these kinds of questions, and then they would arrive at an allocation to say, “Okay, maybe I’m 60 percent stocks, 40 percent bonds at this stage in my life.” As we move through time, that allocation might change in the investment policy statement, but it’s not changed because of the news or because of market activity. It’s changed because of a stage in an individual’s life.

If you have this document that you can reference to say, “Okay, this is why I made the decision because I have these objectives.” And let’s say it’s retirement, in 10 or 15 years, or as a resident, I’m 30 years away from retirement. And you stick to the plan. That’s kind of like your manual or your coaching guide or whatnot to liken it to anything else. It just helps you stay dedicated. In times of trouble, you can reference that document and understand why you’re invested the way you are, to try to eliminate the emotion.

Josh Mettle: And so how does that work out in real life? Let’s say you go through one of these crashes or maybe you go through one of these up-cycles. As always happens, emotion takes place, right? It’s either fear or greed. We go through a crash and fear strikes, and clients call in and say, “You know, I want to sell everything.” Or maybe the other way where the greed takes place and the market is going up, and a client calls in and says, “I’m thinking about taking a $250,000 equity line on my home, so I can buy a bunch of stocks.” How do you actually implement that investment policy statement and work that in with your clients when they have these emotional reactions, which are really kind of natural?

Eric Halvorsen: That’s a great question because it happens, I don’t know if it’s daily but very frequently that happens. And so a client of UMA Financial Services also we take that kind of to the next level and build in a retirement model or retirement savings model, which helps us also drive the investment policy statement. Frequently, we’ll go back to what these inputs are that arrive at the allocation and you say, “Well, look, did anything substantially change in your financial life or are you going to retire sooner? Do you need more income in retirement? Do you need – what’s driving the decision? Is it just I hate my friends who are telling me they’re making tons of money or the account is making, let’s say our account is making lots of money, and I want to make more, so I’m going to be more aggressive. We always have to reference back to those inputs to say why – we help the client think about it and understand the impact on the plan, you know the finish line here, at the end of the marathon, how is this changing the output and your outcome? At the end of the day, though, this is the client’s money, and the client says, “Hey, look. This is what I want to do. We work for the client, and so, they can alter that investment policy statement as they wish, but we try to use that to implement good processes for the client.

Also, part of it is our rebalancing, so individuals will say, “How often should I rebalance my portfolio?” In an investment policy statement, we look at an allocation and then we use one of the commonly used in investment management, it’s called dynamic rebalancing. So, as the assets, each asset in the portfolio grows at different rates, we’re going to be trimming and reinvesting those in underperforming assets. If the whole pie grows at the same rate, there won’t be any trades, and you’ll stick right on your target in the investment policy statement. You got a good point. At the end of the day, it’s the client’s decision and we just try to help the client through those decisions by using some of these frames of references that are tangible, they can see the impact of their decisions.

Josh Mettle: It sounds like maybe said another way, you fight emotion with logic.

Eric Halvorsen: That’s what we try.

Josh Mettle: You just go back to that investment policy statement that was created in a moment of total logic, and then you try and just revert back to that moment of time when we were making decisions in logic, and then at the end of the day, it’s their money as you said. But that’s a great way to bring someone back kind of to the foundation of their plan. I love that.

Eric Halvorsen: You probably do that with your client as well if you think about, “I bought a rental property, and now it’s 2009 and the property has lost 20 percent of its value.” You probably bring the client back to, “Well, the reason we bought this property is because of the cash flow, and you’re still having the same similar types of cash flow whatnot and reassess this is why you made the decision. You don’t want to make – It was a good decision at the time, and you don’t want to make a poor decision now. Let’s let this cycle through.” You’ll probably do a very similar thing with your clients. It’s just a different format.

Josh Mettle: Absolutely. There was a lot of discussion going on during the last crash about you know, “Should I cut my losses and run them down X percent?”

My discussion point was, “Well, what is this property costing you a month?”

Well, nothing. I’m breaking even.” Or, “Well, I’m up $100.”

You have to just go back and say, “Okay, well let’s look at 20 years of Utah real estate or wherever this property was and the appreciation trends, and if this thing isn’t costing you any money and you can still put food on the table, why would you want to lose the future opportunity and cut and run from this property, and maybe have a foreclosure or short sale, and then, you’ve lost your future opportunity cost when the market swings the other direction and you feel comfortable there’s going to be some great buying opportunities that you will not be able to take advantage of if you dump this property and run.” So, very similar.

Eric Halvorsen: Yeah.

Josh Mettle: I love the investment policy statement. It’s just a great agreement that you’re getting a client to come in and agree on a logical approach.

Eric Halvorsen: Exactly.

Josh Mettle: So you had mentioned and actually sent me some great information that I enjoyed on Dimensional Funds, and I have heard different financial advisors, be proponents of Dimensional Funds, but I’d love you to tell our listeners a little bit more about what are Dimensional Funds, and why you advise the use of those funds for your clients?

Eric Halvorsen: To take a little step back, throughout modern history, I guess, you’ve had this argument between active management and indexing. The group on active management will say, “Hey, we believe security selection and market timing benefits clients, and so we’re going to be an active manager.” Active management usually is more expensive, and indexing is kind of all the way on the other side of the spectrum, which is we’re just going to buy a basket of securities like, think of any index, the S&P 500, anything that tracks the S&P 500. They track specific securities, and as that index changes, as the index reconstitutes, it will change the investment lineup within their index.

There’s a middle ground, and Dimensional Funds was kind of the forefront, if not the first participant in this arena. We call it, which are kind of a modified passive approach, or it’s a passive strategy, which is between active and index, but if any of the listeners have had a finance course, they’ve heard of the capital asset pricing model, which is CAPM. I don’t want to get in too much detail, but the CAPM is kind of like the market volatility to generate expected return using what we term as beta.

Dimensional Funds realizes that well, there’s more than just that that distinguishes the expected return, and so some examples might be the size of a company. A smaller company historically has higher expected return than a larger company, and you could think of it in any format. There is more risk with the small company. You, as an investor, would require a higher expected return. Similar things with value companies as opposed to growth, and profitable companies as opposed to less profitable companies. There is higher expected returns in these areas.

Dimensional Fund Advisors and some other fund families now use what these, for lack of a better term tilts, they tilt the portfolio to certain areas like value or size or profitability because they feel like you can consistently get higher expected return based off of some of these factors. They’re not trying to time the market or pick specific securities, saying, “I think Apple is going to be better than Exxon, or what not.” They’re not really necessarily doing that. They’re using fundamental factors here to weight the portfolio.

What’s interesting actually is, if you think of the Russell 2000, which is an index of small company stocks, Dimensional Fund Advisors has a small company fund, and I think that was the first one they launched, and they own more than the Russell 2000 inside of their small company index. It’s very diversified, but yet has some specific factors in which they tilt.

The people behind Dimensional Fund, if someone wants to look at the website, you can just Google Dimensional Fund Advisors and look at the website. I don’t know if you do this, Josh, but you could have seen the thought leaders behind the firm. Eugene Fama is one of the main individuals, and he’s credited with the efficient market hypothesis and just won the Nobel Prize a few months ago.

Josh Mettle: Yeah.

Eric Halvorsen: Ken French as well is a leader in finance. You look at Roger Ibbotson. Robert Merton, he won the Nobel Prize for the Black-Scholes-Merton options pricing kind of formulas. Myron Scholes, David Booth, Rex Sinquefield. A lot of these guys that are main thought leaders in academics have looked through history and found certain factors that add higher expected return, and then Dimensional Funds has put the academics into real-world practice. If you think about your education, or think about my education, there’s a lot of disconnect between academics and application, and Dimensional Funds tries to bridge that gap. I think they do a phenomenal job. We also use other fund families, but this is one that I think has a great story behind it and good history.

Josh Mettle: They take all the guesswork out of it, as far as rebalancing and everything else. That’s why you say it’s a mix between active and indexing in that they handle all the rebalancing and that kind of thing, but they still keep a low cost?

Eric Halvorsen: Yes. The cost is similar to what you’d find in an index fund, and then actually we here, rebalance between asset classes, but they cycle through the investments within the funds. So, they’re taking a, you can’t really use the word active again, but they’re frequently monitoring each of the securities inside the funds, and then we, as UMAFS, will rebalance the total model. They’re rebalancing within the funds.

Josh Mettle: Great. I appreciate it. It definitely helped me understand Dimensional Funds a little bit better. I read the information you gave me, but it kind of goes so in-depth, I love the way that you summed it up for us.

Eric Halvorsen: I try to keep it simple enough that someone that really the end-user should care about getting pure asset class exposure and having an investment advisor put it all together. That’s a lot of information. I want to give enough that some listeners would be interested and follow it and some that might have just gone over their heads, which is okay, too, that’s why they’re practicing physicians and that’s why we’re financial professionals.

Josh Mettle: Yeah, exactly. Well, last but not least, Eric, I’m always curious about how financial advisors are compensated, and I know that the UMAFS has a unique compensation structure for its advisors. Would you just tell our listeners a little bit more about how the UMAFS is compensated and the fees that your clients might pay?

Eric Halvorsen: Yes. I’m glad you brought that up because it definitely is a distinguishing factor between us and a variety of other firms. UMA Financial Services was started years ago to assist physicians with their financial life. A client can come in and the physician can come in, and we can give them guidance and financial advice without any fee. There’s not any cost to that because they’re members of the Utah Medical Association. It’s part of their association dues, but as a firm, we also need to be able to be a viable firm and have clients that are paying clients, so that we can stay in existence.

We do charge for assets under management. It’s typically less than what you might see other competitors charging. The ranges, I’ll just read them off the sheet, so that a client would be aware or an individual be aware of what the assets under management charge would be from $0 to $100,000, we’re 0.85 percent. From $100,000 to $250,000, it’s 0.7 percent, and from $250,000 to $2 million, 0.6 percent, and above $2 million, it’s 0.5 percent management fee, which if any of those individuals listening to the call have an investment advisor, they’re typically going to be paying more and in some cases double what that is. We’re not really a profit generator. We just need to make enough money to cover our expenses of investment management.

We also provide some forms of insurance, we do disability insurance, and life insurance, and those are commissionable products like you’d find with most advisors or brokers. As far as personal compensation, a client is reassured in most cases because my compensation doesn’t change whether an individual becomes a client or not. There’s no ulterior motive as I sit with a financial advisor at UMAFS, I get paid the same amount whether they decide to work with us or just do the free consultation. Most of the physicians feel like that’s a phenomenal benefit. They don’t ever have to feel like they’re being sold something because that’s not what we’re here to do.

Josh Mettle: Yeah. I’ve had the unique, I guess, perspective to speak with you and the different financial advisors there and then also speak with a lot of your clients, and what I’ve come to respect and what I’ve learned about what you guys do, is as you said your fees are less than most other financial advisors. You specialize only in physicians, because I tried to get into your group by the way, and you turned me down graciously. Thank you.

Eric Halvorsen: They did? We’ll take you back. I’m sorry. With someone like that, we could work around that maybe.

Josh Mettle: Okay. We will touch on that again, and I think you guys take actually I know you take a holistic approach because of the span of advice that I see you giving and because you are surrounded by so many different physicians, you get very familiar with the different issues at hand. I really appreciate what you guys have done and the advice that you give your clients. The proof is in the pudding. Your clients trust you implicitly and have phenomenal things to say about the UMAFS.

Thanks for coming on. Thanks for spending some time with us and sharing some insights, and if our listeners want to find out more about UMA Financial Services and potentially get in communication with you, how can they best do that?

Eric Halvorsen: You can go to our website. That might be the first place to start that’s www.umafs.org. You can call me directly, (801) 747-0800 or email me, ehalvorsen – I’ll spell it out, H-A-L-V-O-R-S-E-N, @umafs.org, ehalvorsen@umafs.org.

Josh Mettle: Great, Eric. Thanks again, buddy. It was a pleasure, and we look forward to connecting with you again soon.

Eric Halvorsen: All right. Thanks, Josh.