Transcript
Intro
Stephan Shipe: Welcome back to the Scholar Wealth Podcast. Today we have a question from a self-managed investor asking whether to steer his adult son toward a wealth manager. The gifts they make just sit in cash, and he’s weighing whether a hundred bips a year is worth it just to get the money working. Then a listener selling his business on an earnout wants to know how to plan around it. Everything from the house they’re looking at to when his wife retires hinges on how real the earnout is. Finally, in our From the Field segment, Stephanie Fornaro of Hello Nanny is on the mistakes families make when they hire household support, why job design matters more than the candidate, and the tax structure problem no one talks about when you become an employer in your own home. So let’s go ahead and start with question one.
Question 1 – Should You Steer an Adult Child Toward a Wealth Manager Just to Get the Money Invested?
Stephan Shipe: I’ve always managed my portfolio, and I’m glad I did, because learning while my portfolio was small helped me build the confidence to manage it now at 13 million. If I had a portfolio manager, I’d be paying six figures every year. My son is 28 and we give to him regularly. He isn’t bad with money per se, but he doesn’t have the same interest in finance that I had. The money we give him just sits in his account. Should I suggest a wealth manager to him so the money doesn’t just sit there? Even if they charge him a hundred basis points, or one percent, at least it’s being invested.
This is a really good question. It’s one that we tend to see often, mostly because the people I’m generally talking to are self-proclaimed finance nerds. So they go the extra mile on it. To them, finance is like the dessert of the meal. To your son, it’s like the vegetables, right, that we’re dealing with. So you like to have the spreadsheet and manage it all and everything. I do think that there’s a huge advantage of having some sort of financial experience built up early when the cost is low. The difficulty of it just sitting in cash is a problem that needs to be fixed. He may not like the vegetables, but he needs to eat the vegetables.
I think one factor generally is the factor of it looking a little bit too complex. If he’s never managed the money before, it’s possible he just doesn’t know where to start with it. So if you haven’t had that conversation of, hey, we can invest this just in one or two index funds and you’re fine and you never have to do anything again — you really could have a situation, if it’s already sitting in his account, where the whole process takes five minutes a year for him to invest any gift that he’s getting. And if that hasn’t been presented to him, I’d start there, of just saying, this doesn’t have to be something you like or enjoy doing, but it takes five minutes and you’re done.
It’s going to be hard for you to explain the hundred basis point fee drag for his portfolio now, unless the portfolio is larger. Because what I find is that sometimes backfires, of saying, well, you have $50,000 in the account and you haven’t invested it yet. And he looks at it and says, so you’re telling me it only costs $500 and somebody can invest it for me? And that makes it a lot easier. So would it get that money invested? Yes. But the problem is, over time, he needs to have the experience of at least hopping into the account, placing the trades, and five years, 10 years, 20 years down the road, that’s when that fee becomes a problem, as you’ve correctly pointed out.
That may be the next part. So I’d first start with, let’s look at how much time it would actually take for him to manage it, knowing that he doesn’t care really what the index fund is. He doesn’t care about all the different stuff that you’re likely going to have learned over time. But eventually that’ll come. You have the first process of place a couple of trades, get it invested, you’re done. And then as time goes on, now you start looking at what the fee drag would have been. And this portfolio invested at 8% a year for 20 years is X amount. And if you’re paying a 1% fee now, it’s hundreds of thousands of dollars. And if it’s hundreds of thousands of dollars, you’re going to save yourself that by having a little bit of that experience now, having invested. So I think that makes a lot of sense to start off with, before you go the step of locking them into something that kind of enables him not wanting to manage the account.
Now, if that doesn’t work and he really has no interest in it whatsoever, I’m fine with that too. I think there’s sometimes a misconception around what advisors think of different fee structures and everything else. I’m in complete agreement that an assets under management fee, or an AUM fee, can absolutely work if someone has zero interest whatsoever in managing money, or is not good at managing money. And maybe they need a little bit of some guardrails around how money’s managed and everything else along those lines. So if all of that fails and you have to look for a manager, I think that makes sense. You could go to a good asset manager, have it invested. I don’t think you need to pay a hundred bips for it. Especially in his case, assuming the situation is not very complex, you’re looking at — I mean, thirty to sixty basis points is somewhere where you could get on some of these more fintech platforms if it’s just going to be managed.
Where that’ll fall apart in the future, though, is when there actually needs to be some financial advice given about things that are not in the portfolio. The reason why the fee structures are so low in those areas is they don’t come with the advice aspect typically. So I think you can cut that fee down quite a bit if you were to go into it and find one of these programs, which you’d probably be familiar with or comfortable with online, that could get that lower cost without the headache of managing it. But I think the first conversation is what you’re saying — it’s probably not as big of a headache as he thinks it is.
Question 2 – Planning Around a $4 Million Earnout: Real Money or Lottery Ticket?
Stephan Shipe: I’m selling my business with an earnout structure — $6 million at close and up to another $4 million over three years, tied to revenue targets. I can’t figure out how to plan around it. Do I treat the earnout as real money, or as a lottery ticket I ignore until it lands? The answer changes everything, from the house we’re looking at to when my wife can retire.
So lots of things to unpack on this one, because for those who may not be familiar with how businesses are typically sold, it’s not in cash. So in this case, the listener has sold a business for roughly $10 million, and they gave $6 million in cash and $4 million is coming out in an earnout, which — think of it as contingency payments on performance for the next three years. So if there’s a certain earnout target that’s paid, or a certain revenue target, then earnout is paid. If then in year two, a certain amount of growth is performed, revenue hits that number, then earnout number two happens. And this continues for three years, which is common — usually an earnout over two to three years will work.
Earnouts can be really ugly and get really ugly really fast, because upon selling the business, you may not have the same control as you would have had before the business was sold. So I’ve seen everything from the company hitting a revenue target and then all the cash drained from that company, so they’re going into year two really without the resources they need to hit the next revenue target. So hitting that earnout sounds good on paper, but it can be pretty dangerous later on, because you start losing control, or you don’t have as many levers to pull for control as you had before.
So earnouts, unfortunately, when you look at the actual data related to earnouts — earnouts are really common, happen in most deals — and that’s to mitigate the risk for the buyer. The buyer doesn’t want to just hand you a bunch of cash. They want to hand you enough cash to get the deal done, but then would like to throw the rest of the risk on you. And you hold that risk of, fine, I’ll pay you the 10 million, I’ll give you six now. But if you hit all the goals that you’re telling me you’re going to hit, then I’ll give you the full 10 million, which is how that other four million of the earnout works.
The problem is you’re not going to have the control over it. So I am really hesitant to plan for that four million dollars hitting your account. I wouldn’t base any decisions on that four million. I’d base it purely on that six million dollars. Start focusing on tax savings now on that, start focusing on planning for investing that cash in the account, what the impact of that’s going to be. And the four million dollars is going to be the icing on top.
And unfortunately, the reality of earnouts is, while they are common, the statistics show that you should only get about a quarter of that, maybe twenty cents on the dollar, of what that earnout is, based on historical numbers and research on it. So that four million dollars is probably most likely going to be closer to eight hundred thousand to a million dollars at that earnout on average, which means after tax, now you’re looking at four to five hundred thousand dollars. And that’s four to five hundred thousand dollars received over the next three years. So when you account for the time value of money — in other words, when you account for the fact that $500,000 in three years is not worth $500,000 today, it’s worth a lot less than that, not a ton less, but probably around 20, 30% less than it is then — you’re really looking at a value today of, I would be more comfortable if you were planning for six million dollars plus an expected two to three hundred thousand dollars of actual cash coming in, after tax and in real values today, from that four million dollar earnout.
I know that’s probably not the most exciting news to hear, but I think that’s the way I would go into it. And if it works out and you hit the earnout and four million dollars hits, awesome. Pay your taxes on it, add a couple million dollars, and then go buy the house that you’re looking for. Your wife can retire, all those great things. But I would not bank on that four million dollars until you at least go through year one, maybe even year two, and know whether or not you actually have that money hitting the bank.
I would wait until it actually hits the bank before you make the decision, because I’ve seen situations where somebody’s gone a year, hit the earnout target, and then said, I’m definitely going to hit year two, and they’re six months into year two, and then management comes down on the company that they used to own and says, you know what, we have a new idea. We’re going to change X, Y, and Z to roll out these new products with different profit margins on it and different types of sales. And then you either lose some customers, or sales don’t hit the targets they’re looking for. That pulls down, and now you don’t hit earnout in year two, which means you’re probably not hitting earnout in year three at all, because they’re usually additive, that you’re hitting different targets — especially because you said revenue targets, not growth targets, or something like a CAGR. So if you don’t hit that earnout in year one, the odds that you hit it in year two or year three are even lower. That’s where it compounds. It’s a problem that compounds. It’s hard to bounce back and say, well, I didn’t hit it in year one and year two, but I’ll hit it in year three. Probably not going to happen in those cases.
So I would be very hesitant to account for that four million dollars, and would treat that truly as icing on top, whether or not that’s actually going to come into play. Doesn’t mean you can’t look, doesn’t mean you can’t have some contingencies. I’d at least wait a year to see how things are shaking out before you start giving credibility to any cash flows in year two and year three.
From the Field – Hiring Household Support the Right Way: Job Design, Retention, and the Tax Problem Nobody Talks About
In our From the Field segment, we’re joined by Stephanie Fornaro, founder and CEO of Hello Nanny and founder of the Workforce Infrastructure Institute. Hello Nanny helps families hire and retain household support the right way.
Stephan Shipe: Stephanie, welcome to the Scholar Wealth Podcast. To start off today, share a little bit about your background, how you came to start and build Hello Nanny.
Stephanie Fornaro: Yeah, absolutely. I’d be happy to. My name’s Stephanie Fornaro. I’m the founder and CEO of Hello Nanny, and also the founder of the Workforce Infrastructure Institute. I left my career in medical device sales. I’m a mother of two. I didn’t plan to do this work. I fell into it. Just through my lived experience, I had this burning fire in me to fix the problem that I see in our society, and hopefully make a change so that when I leave this world, it’s a better place for my children and my grandchildren someday.
I came into this work because I raised my daughter as a single mother. And she is now 21. She’s actually graduating this year from college in December. But I had my children 13 years apart, so I had two very different experiences raising them. I raised my daughter on my own with very little help, as a college student and a full-time employee as well. And then later in life, when I had my son, I went into my second marriage very intentionally about what I wanted that to look like, and some of the shortcomings that I found in my first marriage that I wanted to make sure didn’t repeat themselves. And so my husband and I had all of the right conversations. We agreed on what that dynamic would look like, how we would divide things, that I would remain in my career, and agreed to all of those things. But very quickly after the birth of our son, we realized that even with the best intentions and the best conversations, we still weren’t really set up for what it looked like for him as an entrepreneur, me as a career individual in medical device sales. We very quickly found that something had to give. So we ended up hiring a nanny. And through hiring a nanny, it was a revelation for me. And so much so that here we are today, where I am now the founder of Hello Nanny.
Why Job Design Matters More Than the Candidate
Stephan Shipe: That’s great. And I appreciate the background there. What you just described is a story I hear often — they come in, they have busy lives, they’re doing dual careers, they have kids, and now they’re trying to figure out who’s going to pick up the kids, who’s going to take care of them. And then the life cycle of a child, right, it changes — whether it’s just, are you watching them all day, or you’re picking them up and bringing them to sports in the afternoons. How do you start when you’re doing that search? How do you ensure that people know what they should be asking for? Because that seems to always be the problem, that somebody comes in and says, we hired somebody, but now we expect them to do X, Y, and Z, and that’s not what we hired them for originally. So now we have the wrong person.
Stephanie Fornaro: Right. So families don’t always need a nanny. And that’s the misnomer — a lot of people think, we need a nanny, and they start with nanny. But the reality is that not everyone needs a nanny, depending on what stage of life you are in. Zero to five, I would say, is the most common need for a nanny. Those early developmental years, it makes a lot of sense. But families don’t always need a nanny. They need a role that is designed for their actual life. So most hiring mistakes happen at the job design stage — not the candidate stage. Really clearly defining the roles, the responsibilities, and the expectations of the position up front, and then making sure that you hire for that position, and anticipating all of your needs.
So one of the biggest things in this industry is job creep — that a family will hire a nanny, and then the nanny will start, and then three months into the position, it evolves into a nanny slash family assistant role. And then the nanny who isn’t interested in that type of work ends up quitting, because that’s not what they signed up for.
Stephan Shipe: So how do you help deal with that then? Do you help with the job description as well? Or not necessarily the job description — it’s more of understanding what the future needs will be, as opposed to what the need is right now.
Stephanie Fornaro: Right. So you have to be able to look a mile down the road. Look at, what do we need today, and what is the evolution of this position in three to five years? Are we hiring this person just for the next year? Are we hiring this person for three to five years? And what does that next three to five years look like for our family? And how can we make sure that we’re recruiting for the evolution of that position? And so if, after the kids go off to school, this person ideally would transition into being a family assistant, then put that in the job requisition. Anticipate those needs up front. And that will allow you to hire someone who’s open to that, so that long term, this is a sustainable role and the person is in a position that works for them as well.
Stephan Shipe: Do you find that the candidates end up being better when it’s a more sustainable role that’s described?
Stephanie Fornaro: Yes. Setting clear expectations is the biggest distinguisher. That, and clearly defining the roles and responsibilities and guaranteeing hours, is the biggest thing — making sure that the position is sustainable.
Stephan Shipe: Yeah, because it seems like it’s not only guaranteeing short-term hours, but it’s guaranteeing hours five years, ten years down the road, if things are going well. There’s a path where somebody could do this for a long time, as opposed to, well, once our kids hit kindergarten, then you’re back out there looking for another family. Is that the path?
Stephanie Fornaro: Yeah. And there were some things that I did when I first hired our nanny that I didn’t realize were frowned upon. Fortunately for me, I had such a great relationship with my nanny where she was comfortable giving me feedback and saying, hey, Stephanie, you can’t do that, and here’s why. And when she explained it to me, I was like, yeah, that makes sense. I don’t even know why I thought that that was appropriate. But most nannies would not have those difficult conversations. And instead of having those difficult conversations, they would just leave and find another position that understands that. And so that’s really what Hello Nanny does — we bridge that disconnect that exists today, where we educate families on best practices, what to do, what not to do. Because as a parent, you’ve really never worn this hat before, as a mom boss or a dad boss or a domestic employer. And so you’re navigating it for the first time and you’re learning as you go, and you’re making mistakes along the way. And so Hello Nanny is really utilizing and giving all of that knowledge that I’ve acquired over the course of the last eight years, and bridging that disconnect, to set parents up for success with their new hire.
The Mistakes Families Make Without Realizing It
Stephan Shipe: Now you have me curious — what are the things that you’re not supposed to do? What were the mistakes that you made? Because I’m sure there are people listening who are wondering what mistakes they’re making at home right now.
Stephanie Fornaro: So one of those mistakes was banking hours. So if I was going out of town on Friday and my nanny had an expectation that she works on Fridays, but that Friday I wasn’t home — so I said, hey, you know what? I don’t need you this Friday. And she did not work on Mondays. So I said, why don’t you just come in on Monday and make up the hours for Friday that you missed out on? And so it was infringing on, one, her expectations of the position and what we agreed to, that she has Mondays off. And so to have that expectation that she’s making up hours, and that I’m taking the hours from the previous week where it was on my accord that I made that decision that I didn’t need her that day — that then I’m going and banking them for the following week and saying, hey, you can make those up the following week. And when you think about that in a corporate setting, if you worked for a Fortune 500 company, they would never say, hey, office is closed, but we need you to work extra hours next week.
Stephan Shipe: Yeah, that makes perfect sense.
Stephanie Fornaro: Yeah. The other one is guaranteeing hours. So again, putting this into a corporate context — if you say, hey, nanny, I need you to work Monday through Friday from 6 a.m. to 2 p.m. every week. And then your family goes on vacation and they’re like, you know what, we actually don’t need you for the summer because we’re not going to be here, but we’ll see you back in the fall. You can expect that your nanny’s not going to be there for their position in the fall, because they’ve now been unemployed all summer and they need to go find another role. And so by the time you’re home, they’ve moved on and they have another role. You’re like, hey, we’re ready for you to come back now. And they’re like, ooh, sorry, I had to find another position, because I can’t just go without work. So essentially you’re laying off your employee every time you go on vacation. So if you’re disrupting their income and they can’t depend on that income, they’re going to end up finding another family to work for.
The Tax Structure Problem When You Become an Employer at Home
Stephan Shipe: How do you actually handle the income component? This is always a big concern — of payment, and as an employee, getting an EIN number. Walk me through where that starts to fall apart, or when that’s needed, as opposed to just paying cash or writing a check.
Stephanie Fornaro: Yeah, so the IRS rule is that if you pay your nanny over — I think it’s right around that thirty-five hundred dollar mark annually — if you pay them more than that, which most families do that in a month, they are legally required to legally employ their nanny, babysitter, whatever it is, if you pay that person more than that threshold annually. So you are at that point a W-2 employer, and you are required to pay them legally, which is a double-edged sword.
So when I came into this industry, I thought, this is easy, I’ll just advocate for nannies, because my nanny ended up being just such a saving grace for me and for my marriage. There’s actually a story out there that says hiring a nanny saved my marriage. At the time I was going through some postpartum depression and I didn’t realize it. But what I realized, and the reason I started this work, was that part of my story is that my biological mom left when I was five years old. And I spent my entire life wondering, how does a mom leave her children? That’s incomprehensible. And so when I became a mother, I had planned, I’m going to be the mom that I didn’t have. And I did that. And then when I had my son, I went through some postpartum depression, and I realized that the difference between my story and my biological mother’s story was that I had access to support and resources that she didn’t have. And that maybe if more mothers had access to support and resources like this, then maybe there would be fewer mothers that would flee.
And so I had this special place in my heart for my nanny, to advocate for nannies and say, this woman in my life was a godsend. And so surely the least I can do is advocate for nannies and say, hey, families, let’s do this. Let’s make sure that we are not exploiting nannies, that we’re taking care of them, that we’re giving them sustainable careers, that we’re guaranteeing their hours, that we aren’t banking hours, and that we’re paying them legally. And then I realized, in doing that — my goodness, families are the only employers in America who have to fund their employees with post-tax dollars. So they are paying taxes once when they earn the money, and then once when they pay their employee. So that’s the problem — that there is no legal pathway for parents to have the same incentives that a business does. When a business employs someone, they fund their employees with pre-tax dollars.
But it is not that way for parents. And the threshold that you meet in order to be required to employ legally is very small. So that’s what I’m working to do now, is fix that broken problem, to reclassify childcare as the workforce infrastructure that it is. And so what I did was I launched the Workforce Infrastructure Institute, and I’m in the process of getting it formalized as a 501(c)(3), so that I can advocate for parents who are employers, so that we do have the legal pathway to do it the same way a business does.
Stephan Shipe: When you have tax credits related to things like child care expenses and everything — and I don’t know if it’s too far in the weeds of what you’re dealing with, but it sounds like it’s right up your alley — does an employment of a nanny through W-2 count toward those child care expenses, to get any of those credits?
Stephanie Fornaro: Yeah, so the dependent care FSA, it was set in 1986 at $5,000. And the average cost of care in 1986 was $4,500 a year. So it was relative to the cost of care. However, that dependent care FSA has stayed frozen for 40 years. This year is the first year that it increased, and it increased to seventy-five hundred dollars. So it is still a stark contrast to what the actual cost of care is. And most families that are employing a nanny, or a nanny family assistant, a newborn care specialist, any domestic employee — they have the ability to offset their tax liability by $7,500, which might be one month’s salary. The research that I’ve done is that anyone can tap into the dependent care FSA, as long as your employer offers it. But not every employer offers it. And most entrepreneurs — if you’re a business owner, you don’t have a dependent care FSA.
Stephan Shipe: I could see that being problematic, both on that side, but also on just the income side. That if I’m in this situation where I’m hiring somebody and paying them enough to where I have to pay them a W-2, I’m not likely to get any of the child care tax benefits that are out there anyways.
Stephanie Fornaro: And that’s the other analogy that I’ve shared. When you think about a CEO — my husband is a CEO too, and he has over a hundred employees, and he’s on the road 50% of the time. And this is one of the reasons we hired, is because a lot of the time I was a single mom, because his career is so demanding that he has to be. And it’s not because he’s a negligent partner or negligent father. It’s because that’s what it commands of him. So in order for him to produce the level of income that he does, it requires him being removed from the home. And subsequently, someone’s got to fill the gaps. And so it requires hiring an employee to help on the home front where he’s absent.
And so a lot of people think, well, if you’re hiring a nanny, that’s a luxury, that’s a lifestyle choice. And for so many people, it’s not a lifestyle choice. For so many entrepreneurs, without that domestic support that they have on the home front, they wouldn’t be able to perform at the capacity that they do.
Stephan Shipe: And the fact that, if it’s with after-tax dollars, you have to work twice as much to pay for that same amount. And so it pulls you away from the family even further during that point. Interesting.
Stephanie Fornaro: Exactly. Yeah.
What Makes a Placement Last
Stephan Shipe: So give us, as we’re wrapping up here and thinking about this — I know you talked about some of the things of setting expectations early. Somebody’s looking at this and saying, I want to hire a nanny, and I don’t want to make all of these mistakes, and I want to think later on down the road and have all this — what are the characteristics? Maybe give us one or two of the big characteristics that end up leading to these lasting placements. Because I think that’s probably the biggest complaint, is turnover and not having consistency there, in a time where, as you’ve been describing, consistency is so important if you’re getting to the point of needing someone to help out. So give us one or two of those characteristics for lasting placements.
Stephanie Fornaro: So I would say a written agreement. W-2 employment, because they need verifiable income. Without verifiable income, they will not qualify for a mortgage, a car, nothing. It’s not a sustainable career if it’s not verifiable income. And then the other one would be to never classify them as a 1099 contractor. It’s a misclassification, and it exposes you to intense liability. If anything ever goes sour in the relationship, after the fact, you’re open to retaliation and things like that that could leave you in a lot of trouble.
Stephan Shipe: Great advice. Perfect. Well, thank you so much for coming on today. Really enjoyed hearing a little bit about this and all the work that you’re doing.
Stephanie Fornaro: Thank you. Thanks for having me.
Outro
Stephan Shipe: That’s our show. Thanks for listening, and we’ll see you next week.
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