And so as always it is also time for our annual financial and investment literacy quiz…

But first some interesting findings from those who study financial literacy among American adults over time:

• The recently released 2022 Personal Finance Index sponsored by the TIAA Institute and the Global Financial Literacy Excellence Center at George Washington School of Business said that the biggest gap in financial literacy is “understanding financial risk” while the area where U.S. adults are the most knowledgeable is “borrowing money”. Hm. You can find all of the results of this study at https://www.tiaa.org/public/institute/publication
  • One of the questions on this 2022 survey asked which of the following is a greater financial risk:
    • 50% chance of car needing repairs of $1000 in 6 months
    • 10% chance of air conditioner needing replacement at cost of $4000 in 6 months

We have not included this question in our quiz because our definition of financial risk (as all of you can now recite) is having to sell an asset at an inopportune time to cover an expected or unexpected expense.

Now our quiz:

What is the difference between a market order and a limit order?

• A market order means that Marci decides when to buy or sell and a limit order means that Lori decides when to buy or sell
• A market order is an order to buy or sell at current price while a limit order is an order to buy or sell at a specific price or better
• A market order is one that happens when the market is open and a limit order is an order which happens when the market is closed
• This is a dumb question – I am investing for the long term, not buying and selling every day
• No idea. Guess I better call LFS.

What is an expense ratio?

• The cost of buying or selling a stock
• One of the many useless columns in the LFS quarterly spreadsheet
• The amount of money I pay to borrow money from a bank
• The percentage of a mutual fund assets which are used to pay that fund’s expenses
• No idea. Guess I better call LFS

What is the difference between a traditional IRA and a Roth IRA?

• Traditional IRA contributions are tax-deductible and Roth contributions are not
• Roth IRA withdrawals are tax-free and Traditional IRA contributions are not
• Both a and b are correct
• I have both so what difference does it make anyway?
• No idea. Guess I better call LFS

If interest on my high yield savings account is 1% and inflation is 2%, my ability to buy anything in a year will be

• Better than today
• Worse than today
• Bring it on – love to have THIS problem
• Who cares? There is nothing worth buying anyway.
• No idea. Guess I better call LFS.

Which of the following are FDIC insured?

• The $25,000 CD I just bought in my new Schwab account
• The $25,000 in my Synchrony High Yield Savings account
• The $25,000 in cash in my Ameritrade Roth IRA
• My GE stock
• The $25,000 in the Schwab Money Market Mutual Fund
• No idea. Actually do call LFS on this one!

For those of you who have not heard Schwab CEO Walt Bettinger talk on CNBC, we have attached his letter to all of us, clients of Ameritrade and Schwab, sharing his perspective on the banking sector challenges. Clearly this is an evolving story so we expect more to follow.

Our Most Recent Perspective on Industry Events from Founder Charles Schwab and CEO Walt Bettinger.

March 23, 2023

To our clients, employees, and owners:

As someone with an interest in financial markets, you may have seen some of the recent news about the banking sector. If you are like us, you may have also wondered why Schwab has recently been lumped in with concerns regarding regional banks in particular. The fact is we are a different kind of financial firm, which can make us harder to understand. That may help explain many of the misconceptions about us compared to other parts of the financial sector. As such, we want to offer an updated perspective on some of the topics that have come up.

First and foremost, Schwab is a brokerage firm. We exist to help investors and those who serve them. Schwab is the largest public broker-dealer in the U.S. and the most regulated, since we are also regulated by the Federal Reserve. Approximately 95 percent of the $7 trillion clients have entrusted us with is custodied at the broker-dealer and segregated for clients and their benefit. Every client of a U.S. broker-dealer enjoys the same SEC-mandated customer protections. That means these assets are not subject to risk related to banking or credit. Anyone who claims that client investments are at risk from banking issues is ignoring this basic fact. For more information on asset protections, please visit: www.schwab.com/legal/account-protection.

Schwab also owns a bank, though not like other retail banks. Our bank structure exists to help us serve investors’ banking needs. It also helps our financial performance, which enables us to better serve our clients and continue to lower costs. As a different kind of firm – a broker-dealer with a banking side – we do not believe one should confuse our business model with regional banks, or any other banks for that matter, that have different business lines, client bases, and geographic footprints.

It is also important to remember that Schwab was built to serve clients through all economic environments. Our broad base of high-quality clients is well protected. Our firm has capital well in excess of regulatory requirements, a high-quality and relatively small loan book, and a conservative investment portfolio of securities backed by the U.S. Treasury and various government agencies. And more than 80 percent of client cash held at Schwab Bank is insured dollar-for-dollar by the FDIC.

We hope our long track record, conservative approach, and strong financial foundation is all you need to know to feel confident in our ability to serve clients over the long term. But we do know in the swirl of the past two weeks, some very important points are being misunderstood (or sometimes misrepresented) in the public discussion of what is happening. Here is our perspective on some of the misconceptions that have come up:

1. Our stock price does not reflect the strength of our business. Stock prices go up and down and we do not manage our business according to the stock price, but rather according to our long-term view on what is best for our clients and the health of the business. That said, we do not believe recent stock performance reflects our long-term business fundamentals and opportunity. As we shared for the week ending March 17, clients brought to Schwab more than $16 billion in core net new assets. We have attracted core net new assets of approximately $116 billion year to date through yesterday, and have added nearly $1 trillion in the past two years. We see strong flows continuing and remain confident in our fundamentals.
2. Focusing attention on ‘unrealized losses’ in our held-to-maturity (HTM) portfolio is very misleading. These “paper losses” are unrealized and would only be realized if we had to sell those securities. The profile of our depositors is very different from regional banks. Given our significant access to sources of liquidity, there is a near-zero chance we’d need to sell any of our HTM portfolio prior to maturity. That would be akin to assuming a large retail bank would sell a substantial portion of its loan portfolio.
3. Client deposits may move, but they are not leaving the firm. As is the case in every cycle, clients make choices about where to best allocate their assets. As interest rates have increased over the last year, our clients have made choices to reallocate assets within their Schwab portfolios, to reflect their preferences in this market. And in fact, we have actively encouraged them to do so. The important point is that those allocation decisions result in the assets staying at Schwab. Despite the events of the last two weeks, we have not seen any meaningful change in client behavior regarding their cash.
4. We have taken relatively little risk in our portfolio. We take very little credit risk. More than 85 percent of our assets are in a high-quality, liquid portfolio invested in government or agency-backed securities. As a comparison, most major banks have a majority of assets in multi-year residential and commercial loans with significant duration, varying credit quality and little liquidity. We feel comfortable that our portfolio carries materially less credit, duration (sensitivity to rate changes) and liquidity risk than many of those other banks.
5. The way we manage our balance sheet is very straightforward and hasn’t changed. We invest in high-quality securities with a portfolio duration that today is around four years, and just over two years in our available-for-sale (AFS) portfolio. Because of the quality of our portfolio, we are able to maintain access to high levels of liquidity that allow us to hold these investments to maturity if we choose. We have taken this same approach since we began offering banking services almost 20 years ago. We did not make a bet on interest rate movements going down or up, and we did not extend our portfolio long term like some other institutions.
6. We do not forecast Fed rates or make investments based on where rates are going. In our regular business updates, we have relayed the consensus opinion of the market (e.g., Fed Dot plots) at the time. These are not our predictions; we never base our strategy off our own view of interest rates. We share those market opinions in the context of helping analysts understand our business model and potential financial performance.
7. Comparing unrealized losses across firms with different business models can be misleading. Schwab Bank has a different business model than traditional banks. Our deposits come from transactional cash in clients’ brokerage accounts that is swept to our banks. We use about 10 percent of that cash to fund loans to our existing clients and with the remaining 90 percent, we buy securities – the vast majority of which are backed by the U.S. Government. With rates moving up, the fair value of all fixed rate assets – loans or securities – has gone down. But given that our securities are very high quality, we fully expect our securities to reach par at maturity, which means the unrealized “paper” losses will decrease over time. Because a much higher percentage of our assets are securities – and traditional bank loans are not disclosed the same way – our paper losses may appear larger than those of traditional banks. But that assessment lacks the appropriate context. In reality, our portfolio has less credit risk and is actually less sensitive to changes in interest rates than many large banks.

Not all financial institutions are the same; not even all banks are the same. So, one can understand how many watching the public dialogue on banking issues right now might conflate our brokerage-centric business with that of other banks. That is why it is important we set the record straight on some of these topics.

For more than 50 years, our conservative approach to managing risk has allowed our clients to weather market cycles and successfully manage their wealth. We remain confident in our client-centric approach, the performance of our business, and the long-term stability of our company. We are different than other banks. But it is precisely because we are different that we have grown to earn the trust of more than 34 million accounts across a broad spectrum of business lines in the U.S., Asia, and Europe. With this additional information, we trust you too can see why we are proud to be a firm like no other.

Sincerely,

Charles Schwab
Founder and Co-chairman

Walt Bettinger
CEO and Co-chairman

Remember that you can still make 2022 Roth or Traditional IRA contributions until April 17, 2023. The contribution limit for 2022 is $6,000 for those of you younger than 50 and $7,000 for those of you older than 50. Please note on your check that your contribution is for 2022 or let us know and we will send you a deposit slip. (If the year is not indicated, Ameritrade will code the contribution for 2023.) While you are at it, you can also make your 2023 contributions – $6,500 if you are under 50 and $7,500 if you are over 50. You can also increase your employee retirement plan contributions and we can help you with the math to get that done.

We are making good progress moving clients from Ameritrade to Schwab ahead of the official transition which is scheduled for Labor Day weekend. We do expect that the upcoming transition might be a little messy, despite all the work that Ameritrade and Schwab are doing, so we are ready and excited to move as many clients ahead of that date as we possibly can. There are some investment options at Schwab which were not available at Ameritrade, so there are some new things for us to review with you as we move your accounts. Let us know if/when you are ready to do ahead of Labor Day when the transition will happen “automatically.” I will say that some of the transitions have been done 100% electronically and some have been 100% on paper – and we do not know which it will be until we get into it – but we can get this done with you regardless.

And finally, some good news on 529 Education Plans. Many of you have set these up and are contributing dollars for children or grandchildren to pay for future educational expenses. A newly changed rule under the SECURE Act 2.0 now allows dollars (up to $35,000) left over in 529 plans to be rolled into a Tax-free Roth IRA in a beneficiary’s name, as long as the plan has been open for at least 15 years. This change takes away the worry that the dollars will not be needed for educational expenses and then will be partially subject to tax/and or penalties at withdrawal. So good time to get those 529 plans open, even with a small contribution.

Dear Family, Friends and LFS Clients,

We are happy to share our BIG NEWS:

We are moving to Atlanta!

Bernie and Toby

Happy New Year again! As we begin 2023, we have our usual list of things for us to do together. The good news for you is that not all of these action items will apply to you!

First of all, RMDs: As usual, your required minimum distribution (RMD) is based on the year-end balance in your traditional or beneficiary IRA’s. Because the market was less than stellar in 2022, your 2023 RMD is likely less than your 2022 requirement. Your RMDs can be fulfilled in any combination of cash, shares transferred to an after-tax cash account or a tax-advantaged charitable contribution. We will help you get this done, either as one distribution or as periodic withdrawals. Your federal and state taxes are usually withheld. Traditional Roth IRAs have no RMD requirements while Beneficiary Roth’s do, although no taxes are due. The age at which RMDs must be initiated has increased but as always, there are rules around this change. If this change impacts you, we will tell you and help you figure out what to do.

Secondly, contribution limits for all types of retirement accounts have been increased for 2023:

• 401K or 403B: Employee contribution is being increased from $20,500 to $22,500. If you are over 50, your contribution has increased from $27,000 to $30,000. You need to make this change directly with your plan administrator, but we can help you figure out how to adjust your monthly contribution. As always, this contribution can be in any combination of Roth 401K/403B and traditional 401K/403B if your plan offers both. There are no income limits for a Roth 401K.
• Traditional or Roth IRA’s contribution limit is being increased from $6,000 to $6,500. If you are over 50, your contribution is being increased from $7,000 to $7,500.
• Roth IRA’s: Earned income eligibility has been increased:
  • Modified Adjusted Gross Income (MAGI) for full contribution increased from$129,000 to $138,000 for single taxpayers
  • Modified Adjusted Gross Income (MAGI) for full contribution increased from$204,000 to $218,000 for married, filing jointly taxpayers
  • There are partial contributions allowed above these limits. Call us for details.
• SEP or SIMPLE IRA’s: Call us
• You can still make 2022 IRA contributions until April 17, 2023. Special paperwork is required to ensure the contribution is applied to the correct year. Call us.

Next, if you have your cash reserve fully funded (in a high yield savings account please) and have extra coins under your sofa cushions, you can now buy another I Bond for $10,000. The annual interest rate is 6.89% for the first six months for any I Bonds issued by May 30. At that time, the rate will be adjusted again. We can help you purchase I Bonds whether or not you bought one in 2022. Lots of rules here just like last time. Call us.

This is enough for now. We are here to help so feel free to call, text or email. Or drop by!

Hello! It’s Bradley, Marci’s eldest here again (with some light editing from my mom) hoping to shed some light on what FTX is, why it is collapsing, and what that means for your portfolio (spoiler alert, hopefully, not much).

First things first, what is FTX? FTX is (was) a cryptocurrency exchange. This is, very simply, a place where people can buy and sell cryptocurrency (for more on what cryptocurrency is, see the February 28th, 2021 Bernie’s Blog post about Bitcoin). It works similarly to how our Ameritrade/Schwab accounts work. An investor puts money into an account there, and then buys and sells Bitcoin, or other cryptocurrencies (including FTT, the cryptocurrency started by FTX), just as we buy and sell other securities in our Ameritrade and Schwab accounts.

Now, what happened? Like brokerage accounts and banks, FTX did not actually hold all of its deposits in cash. There’s nothing necessarily wrong with this; we all know that banks make loans with much of their deposits (they are required to hold approximately 10% of their deposits as reserves at any given point in time to accommodate customer’s withdrawals), and Ameritrade does similarly with money in money market accounts. However, unlike banks or brokerages, FTX held its reserves in its own cryptocurrency FTT and had lent much of its customer’s deposits to its sister trading company Alameda Research. Because cryptocurrencies are highly volatile, this means that the value of its reserves could very rapidly diminish. And diminish they did, as the value of FTT has plummeted this year along with most other cryptocurrencies. When customers of FTX heard that FTX was in trouble, many tried to withdraw their deposits at the same time, leading to an old-fashioned bank run. This caused FTX to have to declare bankruptcy, which is where we are now.

What caused FTX’s downfall? Several things:

1. The CEO of FTX, Sam Bankman-Fried was less than transparent to his customers about the risks of trading cryptocurrency and then used his customers’ money to fund his other businesses. This is against the law, and he could be looking at significant consequences if found guilty.
2. Cryptocurrency is highly volatile, and essentially unregulated. Unlike stocks and bonds, it has no inherent value, and cryptocurrency exchanges are not protected by the same regulations that banks are. (For example, bank deposits are insured by the FDIC, protecting against bank runs).

How does this affect you, and what can we learn from this? Marci here..

1. Because we do not recommend cryptocurrency for clients, any direct impact of FTX’s collapse should be very small. As of yet, cryptocurrency is quite separate from traditional stock and bond markets, so any spillover should be insignificant.
2. LFS is a fiduciary which means that we are legally obligated to act in your best interests. That includes only recommending investments that are appropriate to your particular situation and which we can explain to you (including the risks).
3. As always, if an investment idea sounds too good to be true, it very likely is.