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In this episode, Royal Standley explores what it means to hit the debt ceiling and why it is a big deal if there is no solution. He shares how hitting the debt ceiling impacts different levels of individuals, from government bodies to regular consumers, and how it impacts financial planning.
Intro: Royal Standley of Oregon Pacific Financial Advisors offering securities through United Planners Financial Services, member FINRA, SIPC, guides clients with empathy in discovering and reaching their financial goals and creates financial plans for clients so they can live their lives by design. In these episodes, he relates his financial insights and discusses timely topics. Royal strives for excellence and has a passion for sharing his knowledge and supporting his community. Now onto the show.
Aric Johnson: Hey, Royal, how you been?
Royal Standley: I'm good. How are you doing, Aric?
Aric: I'm fantastic. I'm so excited to get into today's podcast, but you are in a highly regulated industry.
Royal: Yes, I am.
Aric: And because of that, sometimes we have a disclosure that needs to be read, so let's do it.
Royal: All right. Here's the disclosure for today. Discussions in this show are for educational purposes only. Information presented should not be considered specific investment advice or a recommendation to take any particular course of action. Always consult with a financial professional regarding your personal situation before making any financial decisions. The views and opinions expressed are based on current economic and market conditions and are subject to change. All investing involves risk, including the potential for loss of principle. Securities offered through United Planners Financial Services member FINRA, SIPC, advisory service offered through Oregon Pacific Financial Advisors, Inc. Oregon Pacific Financial Advisors and United Planners are independent companies, and neither Oregon Pacific Financial Advisors nor United Planners offers tax or legal advice.
Aric: Okay, now that we've taken our medicine, can we get on with the show?
Royal: Let's go.
Aric: Hello and welcome to Life by Design with Royal Standley of Oregon Pacific Financial Advisors. Royal, what's going on?
Royal: Nothing much enjoying these beautiful spring days we're having.
Aric: Nice, nice. That is,
Royal: How about you?
Aric: Oh, I'm kind of doing the same. If allergies would just leave me alone. I'd enjoy it a little bit more.
Royal: Allergies are just such wicked little things.
Aric: Yeah. You know, it's, yeah. Well, it's part of life. So anyway, uh, we didn't come here to talk about my allergy issues and me whining and crying on this podcast. We're here to talk about a lot more important things. Much more important.
Royal: That's right. That's right. So, in the Wall Street Journal today, and a really important article on whether or not you should or have to refrigerate your butter. Which is really something I've been thinking about for a while of you pull the butter out of the refrigerator and I like the, uh, the Irish butter. So it's very, very hard when you pull it outta the refrigerator and then you're gouging it trying to get the butter out for your toast and then you put it back. But if you left it on the counter, it would be soft.
Royal: So where do you fall in this argument?
Aric: Well, first of all, I didn't know - what is Irish butter? I didn't know there was an Irish butter.
Royal: I think there's a brand called Kerry Gold and it's just very, very pure and it's like, you know, milk, salt and something else and that's it.
Aric: Okay. Okay.
Royal: So it's delicious. Yes.
Aric: Non-refrigerated. I'm sorry. I can't, I can't do it cuz nothing drives me more crazy than trying to spread cold butter on toast and it's just destroying the bread. And, and I, you know, I've got one of my, I think it's a cousin that, oh, they just solved the issue by putting a slab of butter on there, then they take their toast, put it in the microwave. Well, that kind,
Royal: Come on.
Aric: That was part of it, right? It just gets the bread soft and yeah. It's, it's not a good idea. So I'm, I'm all about the counter.
Royal: Okay. That's okay. That I, I appreciate it. I respect it. My grandmother was that way.
Royal: I, I can't get there. I just can't.
Aric: Oh, you're a fridge guy. Really?
Royal: I'm a fridge guy. But I wish there was a, where there was like just a separate refrigerator that was like, Hey, it's 5:00 AM Let's heat this up a little bit. 9:00 AM Let's bring it back down a little bit.
Aric: That would be really bad for all the other food that's, I believe that's called food poisoning.
Royal: I'm just talking about a specific butter container.
Aric: Okay. Okay. Okay. Well, listeners, listen, Royal gets half the royalties or whatever that's called, when somebody invents something, you guys invent it, but it was his idea.
Royal: Exactly, exactly.
Aric: That’s fair, right?
Royal: I think it's a great idea.
Aric: So, and then those people we just don't talk to, which are margarine people.
Aric: Cause it's soft all the time, no matter where it's at. And I, but I just. I'm all about the pure butter.
Royal: Yeah. It's so good. It is so good. Okay, so also in the Wall Street Journal
Royal: There were numerous articles about our upcoming debt ceiling negotiation and what's going on in the Congress and in the White House to try to figure out whether or not we're gonna continue to pay our debts or not, or Uh, and default on our Liabilities that we've already put in place here. So I thought we'd spend a little bit of time talking about this debt ceiling and what that looks like. As I, I'm not sure a lot of people realize, we actually hit our debt ceiling in January of this year, and over the past five months have just been operating under emergency, uh, an emergency situation where the Treasury Department is doing all they can to kind of manage the incoming tax revenues versus the liabilities that they have to pay out.
Royal: But it's, it's looking like, and no one can give us the exact date, but, uh, the earliest I'm seeing is June 1st, we're going to hit a, uh, point where we could potentially default on our debt. So I thought we'd spend the next 20, 25 minutes chatting about that, what this means for the country, what it means for you as an investor, and things that you can do, and maybe even some ideas that, uh, Congress should start looking at, uh, instead of having these negotiations.
Aric: Not as important as butter, but it'll definitely fill the rest of the podcast. And, and I did not know that, that we hit that in January. That's new to me. I had no idea.
Royal: Yeah, we actually, we hit the, the debt limit. But we've been, we've been managing that through the Treasury Department.
Royal: You know, paying our bills and doing that. But our runway for being able to do that runs out here, uh, you know, in the next months we're, we're recording this mid-May right now, so, people will probably hear it in about a week or so, but we are going, going to hit this limit and, um, or this, this crisis point if we don't come up with a solution -
Royal: Through. Uh, the, the government. So it, it, it is a big deal and I don't think it's on too many people's radars because it's been a while since we've, uh, gone through one of these.
Aric: Yeah. So let's, let's start at the beginning because what is the definition of the debt ceiling? Or, or I guess define it for me and why was it created the first place?
Royal: Yeah, it's a good question. So the original intent of the debt ceiling was prior to 1917 or World War I, whenever there was a bill asking for more financing or issuance of treasury bonds or bills, Congress was basically raising it every time they voted on something like that. So each time the treasury needed to raise funds, they had to go to Congress and say, hey, we're gonna do a debt offering. Do you approve it or not approve it? To make things easier during World War I, instead of the treasury coming to Congress and saying, can we issue this debt? Congress put in, uh, a debt ceiling, basically saying you can raise debt up to this limit as you need it, to fund operations, to fund the programs that we have in, in the case of war, funded, the Department of Defense, funded, all the other areas. And so over the last, uh, a hundred plus years, we've had this debt ceiling in place. We have suspended it from time to time in crisis situations.
Royal: It's designed so that the treasury doesn't have to come back to Congress each time they have to issue debt to, to keep the government going.
Aric: Okay. So because inflation and just the, the overall, I guess inflation would be the only word that I can use here, I'm assuming that the debt ceiling has been increased by either inflation rates or whatever, for the last a hundred years. It had to have adjusted because back then it would've been like, ah, you can have 2 million bucks and now it's like a trillion something.
Royal: Right, right. Exactly.
Aric: Whatever. Right. Okay. So can you give us an example of, uh, a previous debt ceiling crisis and what happened there?
Royal: Yeah, so really since about 1960, the, these have all been pretty, uh, rubber stamped things that, that happen.
Royal: Just kinda a normal function of the government. Government's always voting on something just to keep government moving.
Aric: Keep the lights on.
Royal: Exactly. And so the debt ceiling, uh, conversations were, were really pretty rote. Until we got to the two thousands, and it really hit a crisis point in 2011 where the Republican House, led by John Boehner, basically put its foot down and said, listen, uh, to the Obama administration, we're not going to raise the debt ceiling until you start giving us some concessions. Until you start, uh, basically agreeing to some legislative priorities that we have to help lower the debt. And let's just say that didn't work out terribly well, I think, for either side.
The issue became, is, we have our debt ceiling. We had hit our debt ceiling and now the Republican House used that for leverage to really kind of ring out some concessions from, uh, the Obama administration to cut some some debt as well as cut some spending, more importantly. So it seems to be over the past 15 years or so, the Republican, uh, Republicans in Congress have used the debt ceiling as a leverage tool to help cut spending.
Royal: Which is an interesting and kind of backwards way of looking at it, because the debt ceiling doesn't increase spending. Spending is increased by the laws that Congress, passes, like raising or lowering taxes.
Royal: And agreeing to fund programs like Medicare, defense spending, and all the other programs that the country relies on. So when we get to the debt ceiling, it's really not a question of are we gonna increase spending? It's a question of whether or not we're gonna continue to pay our bills for that spending we've already agreed to. And I think there's, there's good arguments on both sides of we should be really concerned about our debt situation. But on the flip side there, this might not be the right time to really kind of bring out the, uh, the, the pliers and, and the hot pokers.
Royal: To torture the other side to bring about those concessions. So that's where we're at right now. So in 2011, we actually came to agreement and we increased the debt, the, uh, the debt ceiling. But because it took so long to come to an agreement and because the US government looked so dysfunctional, S & P, which is a ratings organization that rates debt both in companies and countries actually cut the, uh, rating for the US from a AAA rating,
Aric: I remember that.
Royal: To AA plus, and it was the first time in history we'd ever had our debt, uh, rating cut. And this caused an incredible turmoil in the markets. Even though we didn't reach a default, it was just that credit rating cut. Uh, the estimate is it increased our, our borrowing costs by about a billion dollars a year, because of that. So, so these negotiations do have consequences and kind of at the end of that tunnel of negotiations, if we don't come up with an answer, there is a default that will occur at some point if we let it keep running like this.
Aric: Okay. So you covered a lot of the, the, a little bit of, a little bit of the politics on this. Is there something else that we need to know as far as the, the far left, far right, conservative versus liberal? Is there anything else that you need to touch on that, their viewpoints on this situation?
Royal: Yeah, I think the, the, the major viewpoints on the conservative side of the, uh, the ledger is really, hey, we're spending too much as a country.
Royal: You know, we have runaway spending. We're, we, we really don't have a consistent way of raising funds because we don't want to raise taxes to pay for the programs we have.
Royal: And on the democratic side, it's really the conversation when we get to the debt ceiling of, hey, we've already voted to increase spending with the bills we have passed. We can't use that as, as a lever for the debt ceiling to make changes to those programs. And I see both sides of those issues. I think they're really, really important, but, because we don't have a, a well-functioning government that can talk to one another, um, there's no other place to do it than really on the battle lines of a, of a fiscal crisis here, which is this debt ceiling issue.
Royal: So that's, that's really where the two sides come together and feel like they can negotiate. But really what needs to happen, and this might touch on the solutions a little bit. We, we just need to kind of depolarize things a little bit so we have people that can have negotiations and conversations before we get to the crisis moment.
Aric: Yeah. All right. Well, you, you spoke about a default, right? So what is the risk if we default and what truly happens? I mean, I don't know exactly understand. I mean, it sounds like our credit rating could drop again, I'm assuming, right?
Royal: Oh yeah. Our, our credit rating will, will drop dramatically. And, and first let's kinda step, step back and say what is a default?
Royal: So a default happens where the government doesn't make a payment. So it depends on, you know, where it doesn't make a payment. But where this will probably come up is we fund our government by issuing Treasuries.
Royal: To raise money and then we pay that back with the taxes we collect. If we can't continue to issue Treasuries, what happens is, is we won't be able to pay those Treasuries back when they come due or make the interest payments on them.
Royal: When we can't make an interest payment, that is when we go into default.
Royal: And we have never, ever done that. And if we were to reach that point on, on Treasuries or on another spending area like Medicare or Social Security, where we just say, hey, we don't have the money, that is gonna be disastrous for the country. I saw one commentator today who basically said, if we, if we default on our debt, don't worry about what's going on with your stock portfolio, worry about your job.
Royal: Because we're gonna see mass unemployment as the cost of borrowing increases dramatically, and as there's just massive cuts across the board. Because once US debt loses that kind of world reserve currency place in the ecosystem, we're gonna be paying a whole lot more for everything. Just across the board.
Royal: So much higher inflation driven by really the brinksmanship over whether or not we're gonna pay, make, make these payments.
Royal: So that's just, that's just kinda one area there. You know, there, there's a number of other areas that will happen in a default, and none of them are good. Nothing positive happens, and also it doesn't solve our spending problem.
Royal: So the biggest thing I have to say is we, we, we really need to figure out a way of getting through this default and then coming back to the table to talk about our spending problem, because I think we definitely have a spending problem in this country, but, making these happen during debt ceiling negotiations isn't the way of making lasting change. If anything, it's just band-aids on the problem.
Aric: Yeah. And from an outside observer and watching all the news and the media, it's, I watch it some, you and I have talked about this before. I try to avoid a lot.
Aric: But you can't avoid all the left versus right. Conservative versus liberal arguments that are always going on. It's, it's everywhere we're saturated. Right? And so it's a little disheartening there. So what would you say is a possible resolution? I mean, if these two groups can't play nicely in the sandbox, what, what's gonna be the outcome?
Royal: Yeah. That, that, that, that's a much bigger conversation of how, how do we get polarization out of, out of Congress, out of the US because that's, that's a road that we've been going down I think for the past, you know, probably 15 years or so, where we really have this red blue divide across the country and it's just getting worse and worse. But the thing we have to remember, these things are pendulum swings, and right now I feel like we're really swinging towards high polarization. I dunno what's gonna pull us back over to working together more, but I'm sure it's out there somewhere. And maybe that's a little pollyannish, but I do think we can't keep going along this without tearing, uh, everything apart and it might need a blowoff of some kind, you know, either a, a national tragedy or, uh, some sort of, of event or figurehead who can come in and kind of bring things back more to center. But that's really what we need is we need to be able to have these negotiations and talk. And come up with a rational spending plan.
Royal: For the US government. Yeah. So unicorns and rainbows, basically what I got for you.
Aric: Yeah. I'm, that's what I'm, that's what I'm, I'm like, you know, for a while I've been like, can we just get a clean slate? Fire everybody, get all new congress, all new Senate, White House. Don't let people that have run, run before or have, you know, don't let run again.
Aric: Uh, just all new people. Only people. Is that possible Royal? Do do you have any people in mind that can possibly do this?
Royal: So are you saying we we should have an election like every two or four years and just -
Aric: We can have people right now, just replace everybody? Yeah, just let, let's have the election now, replace everybody and see if they can do a better job of, of the, with the circus that is going on right now, I don't wanna call 'em all clowns, but doggonit, it's really close to all being clowns. Is that rude to say, is that, is that wrong to say? That's only my opinion. That's not Royal's opinion. Just wanna make sure the audience understands that I, I'm just frustrated. Right. I think that the, I think we're all a little frustrated. So let me ask you this, is there anything we can do, I mean, besides replacing everybody, but that doesn't exactly work out well, number-wise.
Royal: Well, I, I think getting involved in voting with what your beliefs are is, is really the, the most important thing. And then also, you know, talking to the people that you're, you're electing at whatever level and saying, hey, let's bring down this polarization. It's not helping anybody.
Royal: This tribalism in America is, is not good for anybody.
Royal: Uh, you know, so that, that's a starting point there. But, but really these negotiations have to be going on before we're at a, a time like this because the issue becomes, If we don't come up with a, with a, a, uh, a solution to the debt ceiling issue, there's just no other way, um, where the consequences of a default are worse, um, or better than a, um, uh, a vote to extend the debt ceiling.
Aric: Mm-hmm. Yeah.
Royal: You know, the, the consequences of a default are just, just truly awful.
Royal: And I don't, I don't, I don't think people really grasp that.
Royal: That it could be really bad.
Aric: Well, I mean, the jobs thing is what, what got me, uh, when you said that, I, I never really thought of that before. I mean, obviously there'd be some, some, uh, situations, but it sounds like it, it would be more widespread, which is a disaster. Um, so
Royal: yeah, it, it, you know, we're already on the, I think the precipice of a recession.
Royal: Uh, this, you know, and I I, I'm not trying to fear monger, but it could really send us into a depression.
Royal: Um, and also, you know, globally, it's just gonna send shockwaves, across the, uh, the nation. So we, we have to be really careful here, and I think people need to be prepared for that and prepared for, okay, well what happens if and how do I make sure I can make it through whatever happens.
Aric: Yeah. Yep. Well, I know that you talked a little bit about short-term, uh, solution.
Aric: As far as bringing to the table, making decisions. What about long-term? What, what can be done long-term as far as the solution to this? Besides stop spending so much? That's the only solution I've got.
Royal: Well, I personally, I think the, the idea of a debt ceiling is kind of ridiculous.
Royal: Because once again, we need to come up with a better system of managing how much we're spending.
Royal: So I don't know if there's a way of passing laws to basically say, Hey, if we're, if you're gonna increase spending, you have to increase revenue to cover that spending.
Royal: Or at least by a certain percentage, you have to cover it by 80% with new revenue. And that way we don't run into these issues, uh, where a small subset can really hold the country hostage.
Royal: Trying to ring out additional concessions. So that, that's my biggest concern here is, uh, it's just the wrong tool for the job we have. We really need to pass laws that make it, um, that, that just create a better system for passing laws where we're increasing the, increasing the amount of spending. The debt ceiling isn't the right solution for that.
Aric: Yeah. How about we don't allow them to give themselves raises and we make them pay for their own health insurance until they can get the debt under control. What do you think?
Royal: Yeah, yeah. That, that's an, that's an idea, that's an idea, right?
Aric: I mean, yeah. It's that, that's what I think frustrates a lot of people and frustrates me like crazy is all of a sudden you hear that they're, oh, they're, they've given themselves a raise, Um, or, you know, we know that their healthcare plan is, you know, probably the best in the world if, if I'm not mistaken.
Aric: Um, and they don't have to pay for it. So let's, let's let them pay for that and not be able to give themselves raises until they can figure out how not to drive this country into, you know, the poor house, if you will.
Royal: Yes. They're, they're very, very well paid. Very well paid. Yeah. So, yeah, I mean, there, so, so there's, there's definitely some things that can be done, but we, we, we've just gotta kind of take a step back and say, hey, we've, we've gotta be prepared for, uh, what happens if, and so that's where I thought we would just spend a little bit of time here just talking about what I still think is a very unlikely scenario that we do default.
Royal: And I think that's important for people to hear is it is probably an unlikely scenario, but there is that possibility and I, I, it's, it's better than zero that we do default on the debt because of how polarized our Congress and our administration is.
Aric: Yeah. Yeah. Hey, uh, outta curiosity, I know you do a lot of reading. Are there other countries, uh, that you can point out that have, uh, maybe a debt ceiling, uh, situation like this and, um, what they've done to avoid it, come to the table and agree, agree or, or what?
Royal: No, there there's not many countries that have a debt ceiling, like, like the US. Because it, it is a strange way of running the government.
Aric: Yeah, yeah. Especially just keep moving the, the line, right?
Royal: Yeah, exactly. Exactly. So not a lot of other countries are, are following in our footsteps with the debt ceiling.
Aric: Yeah. All right. Well, I would like to ask one more question, uh, for the listeners. If folks are listening and saying, hey, what can I do personally? I mean, besides the voting and all that to, to help this situation, but what can I do in my own scenario, my own finances, to prepare for something if it were to happen again, this is not gloom and doom, this is not doomsday talk, this is just realistic conversation.
Aric: But if people are wondering, what can I do to help guard myself? Um, do you have a couple pointers for them or do you just wanna give out your contact information so they can reach out to you and you can have that discussion cuz everybody's situation's different?
Royal: No, I think, I think it's good. And these, these are also somewhat of our, of our general, uh, conversation points when we're talking about people preparing for an emergency.
Royal: So number one, we, we do think it's a good idea to have a couple thousand dollars that you just have at home or in your safe or under the mattress somewhere. Just having cash in case there is a crisis is just a really good idea. You know? Um, probably anything over $5,000 or $10,000 might be getting a little heavy, but if you have a thousand or $2,000 at home, it just gives you a little bit of extra security there should anything happen.
Royal: The other is, is making sure you have that three months, three to six months of living expenses in the bank. You know, and, and finally we're, we're getting to talk, talk to people about, hey, you can get more interest in the bank than you ever have been able to in the last 10, 15 years.
Aric: Yeah. Yes.
Royal: So, so having that reserve should anything happen, because if we do go through a default like that, uh, you know, people will be losing their jobs. And we also don't know what happens with Social Security.
Royal: Now it's unlikely.
Aric: Whole other can of worms right there.
Royal: Yeah. It's unlikely that they would cut it because Social Security is funded by a payroll tax that is dedicated to Social Security. But it, you know, if, if this does go badly, it is conceivable that payments could be cut. It probably won't disappear, but could be cut, so.
Royal: Having that, that little extra cushion is really a, a, a wise idea.
Aric: Yeah, absolutely.
Royal: Then, then from there, it's really being diversified with your other investments, making sure you can accept the risk. If you feel like you're taking too much risk in your investments, that's a great time to kinda reevaluate things.
Royal: Talk to a, a, a financial professional and work through, okay, how do I take some risk off the table, or how do I position myself to take, uh, advantage of the volatility we might see in the markets. So, all of those things are really good conversations. That are really individual to your situation. So that's why we encourage people to talk to a professional, who can really dive into, uh, those issues and look at it. So, um, the other thing I would say is, you know, try not to watch the news too much.
Royal: You know. Yeah. You'll, you'll know if we default on, on the, uh, on the government, but, uh, or on the government, uh, debt, but, uh, those are probably the major things we're talking to folks about, is that diversification piece. Keeping some cash on hand.
Royal: Keeping that three-to-six-month cushion in the bank that's accessible should anything happen. Um, but other than that, unfortunately there, there's not a ton that you can do because this is such a big issue that we really don't have any control over. This is really being decided by the, the few people that are negotiating it, um, in Washington right now for a crisis that doesn't have to be a crisis right now.
Aric: Yeah. Yeah. All right. Well, Royal, if people want to reach out and talk about that diversification piece, because the other ones are pretty much self-driven, but that one needs to be looked at by a professional. Um, how do they get ahold of you?
Royal: Yeah. You can visit our website at www.opfa.com or give us a call at (541) 772-1116. And Aric, you sound down. I think I bummed you out.
Aric: Yeah, well, no, you didn't. I enjoy spending time with you. The, the issue is that whenever I have to think about how the politicians are behaving themselves in, in Washington and around the country, it's, it's annoying, Royal. I'll be honest, I'm, I'm getting a little annoyed by just all the bickering and I, and you've, you and I've talked about it before. I lean to the right a bit, but it's both sides that are just acting like children.
Aric: Little, little kids stomping their feet, wanting their way, and I'm, I'm getting tired and I think that I, I speak for a lot of people out there that are just, can't you just get along? Can't we just get stuff done?
Aric: Anyway, I,
Royal: I couldn't agree more. I couldn't agree more. Now on the plus side, I think there's a really good chance we come up with a solution to this. I really do. So I don't want people to walking away feeling all doom and gloom, but, there's definitely some gray in the clouds ahead, and that's why I wanted to record this, just to get this information out there and kind of give my perspective on it for what folks can do with their money and just prepare themselves for what could be a rocky summer if we don't come up with a solution to this issue.
Aric: Yeah, yeah. Oh, very good points and I appreciate it. I always appreciate it, even if it's not the greatest news that I've ever heard, it's news I need to hear, so I appreciate Royal very much.
Royal: My pleasure, Aric.
Aric: All right. Thank you again, Royal. And also our last thank you of course goes to your listening audience. Thank you so much for tuning in and listening to the Life by Design podcast with Royal Standley. If you have not subscribed to the podcast yet, please click the subscribe now button below. This way when Royal comes out with a new podcast, it'll show up directly on your listening device. This makes it really easy to share these podcasts with your friends and family. And if you get on there, if you would rate it and leave review, that would be great cause that would help others find the show as well. Again, thank you so much for listening today. For everyone at Oregon Pacific Financial Advisors, this is Aric Johnson reminding you to live your best day every day and ignore what Congress is doing. Talk to you next time. Bye-bye.
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Please note that discussions in these shows are for educational purposes only. Information presented should not be considered specific investment advice or a recommendation to take any particular course of action. Always consult with a financial professional regarding your personal situation before making financial decisions. The views and opinions expressed are based on current economic and market conditions and are subject to change. All investing involves risk, including the potential for loss of principal. Securities offered through United Planners Financial Services (UP), Member FINRA/SIPC. Advisory Services offered through Oregon Pacific Financial Advisors, Inc. (OPFA). OPFA & UP are independent companies. Neither OPFA nor UP offer tax or legal advice.