Bogleheads® on Investing Podcast 008 – Allan Roth, host Rick Ferri (audio only)

00:00:00.000 | [MUSIC PLAYING]

00:00:09.780 | Welcome to Bogleheads on Investing, episode number 8.

00:00:13.360 | In this episode, I'll be talking with Alan Roth.

00:00:16.960 | Alan is a nationally known personal finance speaker,

00:00:20.240 | writer, and the founder of WealthLogic,

00:00:23.640 | an hourly-based investment advisor and financial planning

00:00:26.780 | firm.

00:00:27.280 | [MUSIC PLAYING]

00:00:37.060 | Hello, everyone.

00:00:37.900 | My name is Rick Ferry, and I'm the host of Bogleheads

00:00:40.240 | on Investing, where each month I interview

00:00:42.740 | a new guest about different areas of personal finance.

00:00:46.940 | My guest this month is Alan Roth,

00:00:49.100 | the founder of WealthLogic, an hourly-based investment

00:00:51.980 | advisor and financial planning firm.

00:00:55.060 | Alan is a nationally known writer and speaker

00:00:57.180 | on personal finance.

00:00:58.820 | Over his career, he's been the chief financial officer

00:01:01.460 | of two multibillion-dollar corporations

00:01:04.300 | and consulted with many other corporations

00:01:06.220 | while at McKinsey & Company.

00:01:08.300 | He also taught investments and behavioral finance

00:01:11.660 | at the University of Denver, Colorado College,

00:01:14.460 | and the University of Colorado.

00:01:16.540 | Alan received his MBA from Northwestern University Kellogg

00:01:19.620 | School of Management.

00:01:21.060 | He is a CPA and a certified financial planner.

00:01:24.980 | His book, How a Second Grader Beats Wall Street--

00:01:28.620 | Golden Rules Any Investor Can Learn, has been a bestseller.

00:01:32.260 | He's also written for AARP, The Wall Street Journal,

00:01:35.660 | Financial Planning Magazine, and has appeared on numerous TV

00:01:39.500 | and radio shows.

00:01:40.940 | Alan's professional goal is never

00:01:42.940 | to be confused with Jim Cramer.

00:01:45.500 | With no further ado, let's get Alan Roth on the line.

00:01:48.740 | Hi, Alan.

00:01:49.380 | How are you?

00:01:50.420 | Good.

00:01:50.920 | Hi, Rick.

00:01:51.420 | Thanks for having me on.

00:01:52.660 | I really appreciate you joining us on Bogle Heads on Investing.

00:01:55.540 | And today, we're going to talk about a couple of main topics.

00:01:59.260 | The first thing that we're going to talk about

00:02:01.260 | is the general advisor industry, which

00:02:03.980 | you've been in for a while.

00:02:05.700 | The second thing we're going to talk

00:02:07.940 | about are individual questions about investments per se.

00:02:11.940 | So we'll be talking about municipal bonds and insurance

00:02:15.100 | and so forth as an investment.

00:02:17.700 | So let me go ahead and get into this.

00:02:20.100 | There are so many people out there calling themselves

00:02:22.900 | financial advisors.

00:02:25.700 | Could you tell us what a financial advisor is?

00:02:32.260 | Well, it's really easy to get licensed to call yourself

00:02:36.140 | a financial advisor.

00:02:37.660 | The Series 65 exam is not exactly rocket science.

00:02:42.060 | It's even easier to get an insurance license

00:02:45.540 | where you can call yourself a financial advisor, financial

00:02:48.200 | planner.

00:02:49.760 | But the quality of financial advice

00:02:52.100 | varies all over the map from purely sales-oriented

00:02:56.580 | to advice-only models.

00:03:00.380 | Well, I've got some data here that I want to go over with you

00:03:02.580 | because I think it's interesting.

00:03:04.100 | There are really three basic broad categories of advisors.

00:03:09.020 | And they would be the RIAs, or Registered Investment Advisors,

00:03:14.900 | brokers who work in the brokerage firms,

00:03:18.700 | and probably have a Series 7 exam, which

00:03:21.340 | is the brokerage exam.

00:03:23.000 | And then there are insurance salespeople.

00:03:25.740 | Would you agree that those are the three broad categories?

00:03:29.540 | Yeah, I think so.

00:03:30.500 | That's a pretty good way to characterize it.

00:03:33.300 | So let's now get into how many people fit in each category.

00:03:37.140 | And I just looked up this data.

00:03:39.260 | By far, the biggest category are the brokers.

00:03:42.460 | And according to FINRA, in 2019, basically

00:03:47.760 | the end of February, there was 629,862 registered brokers

00:03:58.260 | who were working in 3,607 registered brokerage firms.

00:04:05.420 | So that's a pretty big number.

00:04:08.020 | By the way, that's down a little bit from 2007,

00:04:10.540 | down about 45,000 from 2007.

00:04:14.620 | So we've lost brokers since the financial crisis.

00:04:18.900 | Insurance salespeople, this was a little bit tougher.

00:04:21.900 | And there might be some overlap here, too,

00:04:23.660 | because a lot of brokers have their insurance licenses.

00:04:27.020 | But insurance sales representatives,

00:04:30.940 | 489,880 insurance salespeople out there.

00:04:41.140 | Let's look at the investment advisor space.

00:04:43.300 | These are the people who are doing assets

00:04:45.140 | under management or hourly.

00:04:46.780 | And some of these might also be selling insurance.

00:04:48.860 | And some of these might also be what

00:04:50.360 | we call dual-registered, which is brokers

00:04:53.460 | plus assets under management.

00:04:55.540 | Anyway, the number of RIAs is 30,266.

00:05:03.220 | 8,000 of those are dual-registered

00:05:06.300 | as brokers and investment advisors, which

00:05:10.180 | leaves a little over 20,000 basically fee-only advisors who

00:05:16.620 | are just collecting fees.

00:05:18.500 | So when I add up all of these and I

00:05:20.340 | take into consideration some overlap,

00:05:23.500 | it becomes a number of about 1 million people out there

00:05:29.020 | are calling themselves financial advisors.

00:05:33.340 | A lot of financial advisors out there.

00:05:35.580 | Like you said, there's overlap between the three.

00:05:37.980 | You can be all three at once.

00:05:40.100 | Two, you can't just assume that all brokers are evil

00:05:43.620 | and all RIAs are good.

00:05:45.220 | I've seen some very good brokers sell some low-cost index fund

00:05:50.060 | portfolios.

00:05:51.460 | And some so-called fiduciary RIAs, CFPs,

00:05:55.700 | sell product that--

00:05:56.660 | I'm not kidding-- had over a 5% annual fee.

00:06:00.500 | Yeah, I've seen a lot of that, too.

00:06:02.340 | On the internet, you can find people

00:06:03.800 | that are charging just for a simple money-managed account

00:06:07.700 | 1 and 1/2% per year, even up to-- somebody showed me one

00:06:10.940 | that was 2 and 1/2% per year.

00:06:12.740 | So it can be quite high.

00:06:13.740 | And that doesn't include the cost of the funds themselves

00:06:16.580 | or whether or not these advisors are

00:06:18.260 | trying to do active management or trying

00:06:20.860 | to outperform the market.

00:06:24.060 | Yeah, there's this belief that fee-only means there's

00:06:26.980 | no conflicts of interest.

00:06:28.420 | And let's face it, any time a dollar changes hands,

00:06:30.820 | including my hourly model, there are conflicts of interest.

00:06:34.700 | And the best regulator out there is the consumer.

00:06:38.340 | Make sure that you understand it.

00:06:40.100 | Simplicity almost always trumps complexity,

00:06:43.380 | with one exception being taxes.

00:06:45.820 | Yeah, let's get into the conflicts of interest.

00:06:48.220 | Let's start out with the commission model

00:06:50.700 | first, where an advisor is paid a commission

00:06:55.020 | to put their clients into certain products.

00:06:57.900 | And depending on which product they put their client into,

00:07:01.940 | they'll get a higher fee or a higher commission

00:07:04.980 | or a lower fee or a lower commission.

00:07:07.060 | Let's talk about commissions.

00:07:08.820 | And what is the benefits of using

00:07:10.740 | an advisor who does commission?

00:07:13.340 | And what is the disadvantage of using

00:07:16.180 | advisors that do commission?

00:07:18.380 | Well, let me first say, as an hourly advisor,

00:07:21.420 | I've got bias on all of my answers.

00:07:23.900 | So I want to just disclose that.

00:07:26.660 | Commission, not only how much will

00:07:29.260 | they get paid in commission, but will they get that vacation

00:07:33.300 | at the Broadmoor Resort, or other things that are driving

00:07:36.980 | why they're selling what they're selling.

00:07:38.660 | So the pros are that typically it's a one-time fee.

00:07:42.460 | And quite frankly, many times I see

00:07:45.740 | AUM charging more than people would be paying

00:07:48.660 | under a commission model.

00:07:50.540 | But obviously, they sell what they're being paid to sell.

00:07:54.460 | And it's the least transparent.

00:07:55.940 | You can't find out how much the person is

00:07:59.220 | getting for selling that product.

00:08:01.940 | The tax laws, recent tax law changes,

00:08:03.740 | have actually changed a few things.

00:08:05.580 | If you're paying commission now, that actually

00:08:07.780 | comes out of the amount that you're paying for the product.

00:08:12.820 | And so when you sell whatever it is you sell,

00:08:16.260 | you're not paying taxes on the commission part.

00:08:20.180 | So it's actually a more tax-advantaged way

00:08:21.900 | of doing it.

00:08:23.180 | Agreed.

00:08:24.020 | I'll say it another way.

00:08:25.420 | If you bought something like American Funds

00:08:27.180 | and you had a million dollars--

00:08:28.980 | I'm not advocating American Funds

00:08:30.660 | or not advocating American Funds.

00:08:32.100 | But if you had a million dollars and you invested them

00:08:34.660 | through a broker in just American Funds,

00:08:38.500 | I believe that there's no commission

00:08:40.420 | to buy American Funds.

00:08:41.820 | And the broker gets a quarter of a percent 12(b)(1) fee,

00:08:45.580 | which comes off the top on an annual basis.

00:08:49.660 | Well, you're not paying taxes on that 0.25%.

00:08:53.180 | So it comes out pre-tax, comes out of your returns.

00:08:58.220 | You're absolutely right.

00:08:59.260 | I totally agree with that.

00:09:00.380 | The new tax law has made commissions more tax-efficient.

00:09:04.700 | Yeah, that's interesting.

00:09:06.340 | AUM advisors will complain profusely

00:09:08.460 | about anybody who gets a commission.

00:09:10.140 | And yet, now the AUM fee is not as tax-efficient.

00:09:17.380 | I agree with that.

00:09:19.460 | Alan, let's go to the next way in which advisors get paid,

00:09:23.540 | which is percent of assets, where some people call

00:09:27.940 | this fee only.

00:09:29.700 | And what are the benefits of paying an advisor

00:09:33.580 | for a percent of assets?

00:09:35.100 | And what is the disadvantage?

00:09:38.020 | Well, fee only includes assets under management,

00:09:41.180 | the ongoing percentage, and hourly as well.

00:09:45.100 | But the AUM, in particular, the assets under management,

00:09:49.380 | you have $1 million.

00:09:50.500 | I charge you 1%.

00:09:51.820 | That's $10,000 a year.

00:09:54.180 | The pros are that the advisor doesn't get paid

00:09:57.740 | to sell a particular product.

00:10:00.300 | And there's far more transparency,

00:10:02.820 | because you can see what the advisor is taking out

00:10:06.860 | of your portfolio.

00:10:08.460 | But you actually have to go and look.

00:10:10.180 | Many people I speak to don't know how much they're

00:10:12.380 | paying on the AUM.

00:10:15.060 | The cons are that they're paid to capture your assets.

00:10:19.780 | Are they really going to tell you to pay your mortgage down?

00:10:22.500 | And talking about the new tax law, the majority of people

00:10:25.900 | aren't getting a tax deduction on the entire amount

00:10:29.180 | of the interest they're paying on their mortgage.

00:10:32.900 | So they're paid to capture assets.

00:10:35.380 | They're paid to overcomplicate things,

00:10:37.340 | because if the advisor gives you just a handful of funds

00:10:41.620 | and doesn't make changes on an ongoing basis,

00:10:45.700 | the client is going to say, why am I paying for it?

00:10:48.740 | So the cons are the overcomplication,

00:10:52.020 | capture assets, and constantly making changes.

00:10:56.260 | I'm going to throw another one out there.

00:10:58.700 | I think that doing a all-in fee, it's not quite a wrap fee,

00:11:03.940 | according to the SEC definition.

00:11:06.500 | But when you add in financial planning

00:11:09.660 | to portfolio management and you're

00:11:12.380 | charging for financial planning based on the amount of money

00:11:16.460 | somebody has with you, the person who has $2 million

00:11:21.180 | is paying twice as much for financial planning

00:11:23.580 | as the person who has $1 million,

00:11:25.020 | but they're getting the same service.

00:11:27.700 | Well, not only that, but oftentimes I'll

00:11:29.900 | have clients with-- they've just sold their business.

00:11:33.120 | They've got tens of millions of dollars all in cash.

00:11:36.420 | So that's a relatively simple plan to do.

00:11:39.580 | At other times, I have people that

00:11:41.180 | come to me with $100,000 in three different annuities,

00:11:46.980 | and I can't help them on a cost-efficient basis.

00:11:51.060 | So the amount of financial planning

00:11:53.500 | really isn't correlated all that well

00:11:55.740 | to the size of the portfolio.

00:11:58.020 | And I agree.

00:11:58.820 | So my view has been that you should

00:12:01.340 | pay for portfolio management some low fee,

00:12:04.340 | if that's what you want, ongoing portfolio management.

00:12:06.660 | And everything other than that--

00:12:08.900 | financial planning, estate planning,

00:12:10.740 | some sort of tax planning, insurance planning,

00:12:12.740 | and everything else-- should be separate.

00:12:15.060 | Should be a separate billing function

00:12:16.740 | based on the amount of time it takes to help a client.

00:12:19.860 | That's my belief.

00:12:21.380 | Yeah, I totally agree with you.

00:12:22.740 | The one exception would be, as a financial planner,

00:12:25.640 | I'm not licensed to do estate planning.

00:12:27.620 | I'm not an attorney.

00:12:29.060 | So I work with the client's attorney

00:12:32.020 | to make sure that my plan is consistent with their estate

00:12:35.540 | plan.

00:12:37.340 | You don't do tax returns either, correct?

00:12:39.780 | I am a CPA.

00:12:40.940 | But yes, I do not do tax returns.

00:12:43.260 | So those two things would be outsourced.

00:12:44.940 | Somebody else would do them.

00:12:46.300 | Yeah, I am licensed.

00:12:47.380 | Well, a lot of what I do is tax-related,

00:12:51.620 | is looking at what are the tax implications of moving

00:12:55.000 | the portfolio to something more tax-efficient, et cetera.

00:12:59.180 | What are the taxes that are going

00:13:00.580 | to have to be paid versus the benefits going forward?

00:13:04.780 | Let's go to the third model, which

00:13:06.160 | is hourly, which is also called advice only.

00:13:11.100 | And that's what you've been doing for some time.

00:13:13.540 | Personally, that's what I'm going to be doing starting now,

00:13:16.740 | launching my new firm.

00:13:19.260 | And thank you for your help, by the way,

00:13:21.020 | in giving me some guidance on how to do that.

00:13:24.500 | But the hourly model, the benefits and the disadvantages.

00:13:30.620 | Well, I obviously am very biased.

00:13:33.140 | And I'm thrilled, by the way, that you're

00:13:34.980 | going into the hourly model.

00:13:36.580 | I argue that every profession on Earth--

00:13:39.380 | sorry for this really bad joke, but even

00:13:41.180 | the oldest profession on Earth is fee for service.

00:13:43.660 | Did you come up with that?

00:13:49.340 | I think I did, but I'm not positive.

00:13:52.580 | All right.

00:13:54.100 | Giving advice and not having a way

00:13:57.900 | to profit from that advice, in my opinion,

00:14:01.180 | lowers, not eliminates, but lowers

00:14:03.660 | the conflicts of interest.

00:14:05.220 | I can recommend any product anywhere,

00:14:07.440 | paying down the mortgage, a CD at a particular bank

00:14:11.020 | with an easy early withdrawal penalty, et cetera.

00:14:14.300 | So I love it from that respect.

00:14:16.620 | Cons are there's still an incentive

00:14:19.860 | to overcomplicate to make sure that the client has

00:14:23.540 | some dependency.

00:14:25.380 | The advisor can say, I think I know

00:14:28.460 | what sectors are going to outperform

00:14:30.020 | what the market's going to do.

00:14:31.260 | So we need to meet quarterly, et cetera, to keep billing fees.

00:14:36.700 | Many say that it's easy to pad hours,

00:14:38.820 | but I would argue that's just completely fraud.

00:14:41.180 | So fraud can be done in any of the three models.

00:14:45.580 | What else do you have for us?

00:14:47.380 | Well, again, anytime a dollar changes hands,

00:14:50.060 | there's conflicts of interest.

00:14:52.020 | So make sure that when you meet with the advisor,

00:14:55.660 | you understand what it is they're wanting to do.

00:14:58.100 | You agree with it.

00:14:59.900 | That it's simple, that you understand

00:15:02.260 | what the total fees are, that you can explain it

00:15:06.540 | to any eight-year-old.

00:15:08.180 | Be your best regulator.

00:15:09.380 | That's my advice.

00:15:11.380 | One last thing I think is a pro to the hourly advice only

00:15:14.660 | model is that it's the most painful, and pain is good.

00:15:19.540 | When I say painful, the client gets an invoice.

00:15:23.100 | They have to make a payment right out of check,

00:15:26.100 | do a bill pay or something like that so they

00:15:28.820 | know what they're paying.

00:15:30.060 | And that pain is a good thing, so they

00:15:33.100 | understand what they're paying.

00:15:34.420 | Again, so many clients don't know

00:15:36.740 | what they're paying in the way of commission or even the AUM.

00:15:40.580 | So transparency and pain is good.

00:15:43.820 | Wouldn't that, though, prevent somebody from calling you

00:15:46.140 | if they really needed to?

00:15:47.140 | In other words, like a lawyer or someone,

00:15:50.100 | if you pick up the phone, every time I pick up the phone

00:15:52.540 | and call you, I know I'm going to have to pay something.

00:15:54.420 | So that might be a deterrent for me

00:15:55.860 | to actually call when I should.

00:15:58.340 | Absolutely, the same thing can happen

00:16:00.500 | if you're having a medical issue,

00:16:01.900 | but don't go to see the doctor.

00:16:05.300 | So just have to make sure that the advice you're giving

00:16:09.700 | is worthwhile.

00:16:10.820 | And my own particular model is my agreements

00:16:15.260 | give the client the right to cancel

00:16:17.460 | invoice on anything they don't think

00:16:19.540 | they've received value from.

00:16:21.940 | The first time I met John Bogle roughly 16, 17 years ago,

00:16:26.940 | he told me a story that resonated with me.

00:16:30.100 | The advisor meets with the client,

00:16:32.380 | and the client wants a new portfolio.

00:16:34.700 | The advisor designs the simple, low-cost, balanced portfolio,

00:16:41.500 | and the client goes away.

00:16:43.500 | Next year, the client comes and says,

00:16:46.660 | will you take a look at my portfolio?

00:16:48.260 | What should I do?

00:16:48.980 | And the advisor says nothing.

00:16:51.340 | The year after that, same thing happens.

00:16:53.380 | And a year after that, the client finally says,

00:16:57.300 | why am I paying you?

00:16:59.220 | You're telling me to do nothing.

00:17:00.620 | And the advisor answers, to make sure you don't do something.

00:17:05.380 | And that kind of resonated with me in my hourly model,

00:17:09.660 | that once you design the plan, sticking the plan

00:17:12.780 | and doing nothing is the right way to go.

00:17:16.260 | So what you're saying is that the advisors who

00:17:18.820 | are charging 1% and doing both money management

00:17:22.700 | and financial planning, the financial planning portion

00:17:26.580 | is really done in the first year.

00:17:28.780 | Why are they continuing to charge 1% per year

00:17:31.060 | every single year after that?

00:17:33.500 | Exactly.

00:17:35.220 | I want to ask a couple of questions about fees,

00:17:37.300 | because I've been doing a lot of debating on Twitter

00:17:40.140 | with other advisors about this 1% AUM fee.

00:17:44.820 | And on average, when you look at all the data

00:17:46.860 | from various places, if a client has $1 million,

00:17:51.940 | the average AUM fee to manage that portfolio

00:17:57.220 | and provide some financial planning,

00:17:58.740 | or maybe not provide financial planning,

00:18:00.380 | just to manage the portfolio, is 1%.

00:18:03.900 | So a $1 million portfolio would be $10,000.

00:18:08.540 | And I argue about this.

00:18:09.900 | I say, well, why would you pay $10,000

00:18:11.820 | to have a portfolio managed?

00:18:13.020 | My gosh, you can go to Betterment,

00:18:15.500 | or you could go to Vanguard and have

00:18:17.940 | it managed with a professional for just a fraction of that.

00:18:22.860 | And the advisors who are charging 1% come back and say,

00:18:26.300 | well, we add value.

00:18:28.660 | But what I don't understand, though,

00:18:30.740 | is how much does an actual financial plan cost?

00:18:34.540 | I look at some data from Michael Kitsis.

00:18:37.540 | And he's got a very in-depth study

00:18:40.820 | about the cost of financial planning,

00:18:42.980 | how financial planners get paid.

00:18:44.820 | And generally, he says that the typical financial plan

00:18:49.940 | runs anywhere between 10 and 20 hours, so call it 15.

00:18:54.140 | And the typical financial planner

00:18:55.900 | gets paid, if you're going to break it down to an hourly

00:18:58.300 | basis, $200 to $250 an hour.

00:19:00.940 | So net-net, the average median financial,

00:19:03.420 | full-blown financial plan is around $3,500.

00:19:06.540 | This is just a middle-of-the-road number.

00:19:08.460 | And I know that it varies widely from one side to the other.

00:19:12.020 | So the advisor who is charging a $2 million client, almost 1%,

00:19:16.740 | I'll just call it 0.9, is charging the client $18,000.

00:19:20.580 | And if the financial plan costs $3,500,

00:19:24.020 | the client is paying $15,000 a year

00:19:27.060 | to have their $2 million portfolio managed,

00:19:29.060 | which to me, as a portfolio manager, a former,

00:19:32.340 | seems extremely high.

00:19:34.020 | So I don't understand how the 1% AUM wrap fee, if you will,

00:19:39.860 | works out when the cost of financial planning--

00:19:44.100 | and it's usually just a one-time cost, correct?--

00:19:46.700 | is really not that high.

00:19:49.340 | You just hit on something.

00:19:50.940 | It's a one-time cost.

00:19:52.580 | So yeah, you're right.

00:19:53.740 | I would guess my average plan is around 15 hours or so.

00:19:58.140 | I'm more expensive than that $250.

00:20:00.700 | But once the plan is done and we move towards simplicity,

00:20:05.020 | there's some pretty easy rules to give clients

00:20:08.900 | on how to manage their own portfolio.

00:20:12.380 | And rarely do things change that much in one year.

00:20:17.460 | Occasionally, somebody sells their business or something

00:20:20.060 | like that, and the plan needs to be updated.

00:20:23.660 | But it's pretty much a one-time plan.

00:20:25.980 | I tell all my clients, my goal is, after the engagement,

00:20:29.940 | is to be fired.

00:20:32.260 | And I'm proud whenever the client, at the end of the plan,

00:20:35.340 | says, this is great.

00:20:36.700 | You're fired.

00:20:37.340 | [LAUGHTER]

00:20:40.220 | Plans can be simple or very complex,

00:20:42.500 | depending upon what situation the client is in.

00:20:46.060 | But then once the plan is done, there's

00:20:48.740 | simple rules going forward.

00:20:50.020 | Because I really know that I don't

00:20:51.740 | know what the market's going to do or anything like that.

00:20:55.940 | If the market plunges and they want

00:20:58.100 | me to charge them an hour to tell them to stick to the plan

00:21:01.740 | and rebalance and buy now that stocks are on sale, I'll do it.

00:21:04.940 | It's a lousy use of their money, but I would do it.

00:21:08.380 | Not everybody can afford financial planning, right?

00:21:11.340 | I mean, if you've got a $1 million portfolio, $2 million,

00:21:13.740 | you probably can afford a financial plan.

00:21:17.300 | But there are some alternatives now

00:21:19.420 | for people who don't have a lot of money.

00:21:22.420 | Not only are there companies like Vanguard and Betterment

00:21:27.900 | and now Schwab charging relatively low fees,

00:21:30.300 | but there are hourly planners out there

00:21:32.420 | who will help people, correct?

00:21:35.660 | Yeah, absolutely.

00:21:36.740 | And probably the best group of hourly planners I know

00:21:40.540 | are Sheryl Garrett and the Garrett Planning Network,

00:21:43.780 | really try to help the middle market

00:21:46.220 | and are terrific advisors.

00:21:48.220 | I'm not a member of the Garrett Network,

00:21:50.340 | but think very highly of Sheryl Garrett and her network.

00:21:54.620 | I've known Sheryl for many years, and they do a great job.

00:21:57.980 | Now, some of them do manage money, I understand.

00:22:00.420 | But I think the focus of that organization is on hourly.

00:22:05.780 | I know that if you're going to hire a financial planner,

00:22:09.700 | you need to really ask them, even

00:22:11.260 | if they're in the Garrett Network,

00:22:12.820 | you really need to ask them how you get paid

00:22:15.820 | and what their business model is.

00:22:18.340 | No, absolutely.

00:22:19.420 | No matter what model you're using,

00:22:21.580 | I think the most important question

00:22:23.780 | is, how much am I paying in total fees?

00:22:25.940 | Because you mentioned that 1% AUM.

00:22:28.900 | Let's say they put you in other funds that have another,

00:22:31.620 | let's say, 0.5% in average fees.

00:22:35.380 | And what really matters is one's real return, how much you're

00:22:38.820 | making after inflation.

00:22:41.060 | So if, let's say, a balanced portfolio might beat inflation

00:22:44.740 | by 3%, if you're paying 1 and 1/2% in total fees,

00:22:49.460 | I don't care whether it's hourly commission, AUM, the fund

00:22:54.500 | fees, et cetera, you're giving away half of your real return,

00:22:59.420 | your real growth.

00:23:01.380 | I want to ask you about these robo-advisors.

00:23:03.240 | I mentioned them a minute ago.

00:23:04.820 | Oh, Betterment and Vanguard is sort of a robo-advisor.

00:23:09.100 | And now Schwab is charging just a flat fee.

00:23:11.580 | They just came out last week and said

00:23:13.120 | that their fee is going to be $30 a month for portfolio

00:23:17.980 | management and financial planning, basically

00:23:20.860 | unlimited financial planning.

00:23:22.340 | Who do you think these services are designed for?

00:23:25.300 | I mean, how deep do they get on the financial planning

00:23:28.900 | side for the low fee?

00:23:30.980 | Well, any time fees go down, it's a wonderful thing.

00:23:34.540 | And don't forget, Schwab has had the intelligent portfolio,

00:23:37.020 | the zero fee.

00:23:38.140 | But of course, they have fees in other areas as well.

00:23:42.780 | So any time fees go down, I think it is a wonderful thing.

00:23:46.780 | In terms of the financial planning

00:23:49.140 | that they're giving, quite frankly,

00:23:50.740 | I don't know exactly what they're giving.

00:23:52.820 | I know that there are some conflicts.

00:23:55.180 | I've written even where I disagree with Vanguard on,

00:24:00.180 | again, paying down that mortgage and such.

00:24:02.420 | So all advice has some bias.

00:24:06.940 | But a good financial plan at a low fee is a wonderful thing.

00:24:11.260 | I'm a big fan of robo-advisors.

00:24:14.220 | I think software can manage portfolios better than people.

00:24:18.100 | There's a lot of data to show that advisors

00:24:20.820 | were very heavily in stocks at the market high in '07

00:24:25.260 | and turned to cash at the market low in '09.

00:24:28.460 | And software is going to do the opposite,

00:24:31.220 | is going to stick to the asset allocation and rebalance.

00:24:35.460 | So I think it's absolutely a wonderful thing.

00:24:38.620 | But it's also kind of a cookie cutter approach.

00:24:41.380 | Rarely do I have a client come to me

00:24:43.700 | that doesn't have a portfolio already with huge tax

00:24:47.420 | ramifications of getting out.

00:24:49.340 | So it doesn't fit into a cookie cutter sort of portfolio

00:24:53.300 | that robo-advisors typically use.

00:24:56.460 | I agree with that.

00:24:57.460 | If everything was tax-free, it would be easy.

00:25:00.660 | And you could easily just move people around.

00:25:02.820 | But the real problems are working around the tax issues.

00:25:06.100 | I certainly could not turn my portfolio over to a robo-advisor

00:25:12.660 | because I would have huge tax ramifications for mistakes

00:25:17.020 | that I've made earlier on for the fact

00:25:18.940 | that there weren't total stock index funds when I started

00:25:23.020 | investing and the like.

00:25:25.420 | So I've got a question, a little bit off topic.

00:25:27.700 | But balanced funds seem to do a lot

00:25:32.340 | of the work of a robo-advisor, like Vanguard Life Strategy

00:25:36.100 | Funds or a Vanguard Balanced Index Fund.

00:25:40.220 | And I know that iShares also--

00:25:42.420 | BlackRock also has iShares that are doing

00:25:45.900 | balanced-type investing.

00:25:48.100 | What do you think of just using a balanced fund

00:25:51.220 | to do everything?

00:25:52.580 | Probably the best robo-advisor out there,

00:25:54.620 | if it's ultra-low fee-- again, the target date retirement

00:25:57.500 | funds, as long as they're very, very low cost,

00:26:01.340 | are great robo-advisors that do all of that for you.

00:26:04.980 | The one thing you don't get is the asset location.

00:26:08.660 | I've always argued that investing is simple.

00:26:10.700 | I never argued that taxes were.

00:26:12.660 | What I do for my clients are try to put certain assets,

00:26:16.420 | like fixed income things that are taxed at higher rates

00:26:19.140 | in the tax-deferred accounts, and very tax-efficient

00:26:23.180 | investments, like total stock index

00:26:25.260 | funds in the taxable accounts.

00:26:26.740 | So you do lose that tax efficiency

00:26:29.460 | by going to a one-fund sort of solution with a target

00:26:32.900 | date or a balanced fund.

00:26:35.180 | But there are tax-efficient balanced funds.

00:26:38.220 | Yeah, that's true.

00:26:40.020 | They're not putting the assets in the right tax wrapper.

00:26:44.140 | They may not generate as much in the way of taxes.

00:26:48.260 | But the fixed income for clients that

00:26:50.820 | are in a high-income bracket, that's

00:26:53.580 | much better located in the tax-deferred account.

00:26:56.340 | Because if you have stocks in the tax-deferred accounts, what

00:26:59.620 | you're doing is eventually creating

00:27:01.540 | what would have been a long-term capital gain.

00:27:03.780 | And you can defer that on a tax index fund.

00:27:06.620 | You're in control of the capital gain.

00:27:09.020 | So you're converting it to ordinary income

00:27:10.900 | when you have to start taking it out, either to live on

00:27:13.820 | or for the required minimum distributions.

00:27:17.140 | Got it.

00:27:18.020 | Ellen, I was at an ETF conference about a month ago.

00:27:21.700 | And the big thing that they started talking about there

00:27:24.580 | was this thing called direct indexing.

00:27:27.020 | And what direct indexing is, is you give a money manager--

00:27:35.140 | call it a million dollars.

00:27:36.860 | And they buy all 500 stocks in the S&P 500

00:27:41.020 | with that million dollars in fractional shares.

00:27:43.980 | Or they might do some sampling and buy 250 stocks.

00:27:47.300 | And then they'll selectively sell off individual stocks

00:27:51.340 | when there is a loss to generate a tax loss.

00:27:55.540 | And then they might replace that with another stock that

00:27:59.540 | is not part of the 250.

00:28:01.420 | Or they might wait 30 days and rebuy the stock

00:28:03.580 | and avoid tax wars rules.

00:28:05.740 | Whatever their particular strategy is.

00:28:08.260 | But the idea is that you can generate a lot of tax losses.

00:28:13.860 | And if you happen to have a big taxable gain in a low-cost base

00:28:19.060 | of security or some other reason that's

00:28:21.580 | going to give you a big tax gain,

00:28:23.260 | this is a way of offsetting some of those taxes.

00:28:26.740 | I look at it skeptically.

00:28:27.860 | But what are your views on direct indexing?

00:28:31.820 | Wealthfront was the first robo-advisor

00:28:34.220 | that I saw doing it.

00:28:36.740 | And I wrote about it.

00:28:37.780 | And I think that it's a wonderful thing.

00:28:40.860 | But the tax alpha, as they call it, is really overstated.

00:28:46.260 | So what happens, assuming that the market moves up

00:28:48.860 | over the long run, the amount of tax losses generated

00:28:52.740 | go down year after year after year.

00:28:55.300 | And there's very little tax gain going forward.

00:28:59.700 | But the problem with this is that the fees stay forever.

00:29:03.460 | The complexities stay forever.

00:29:05.940 | But the tax benefit goes down.

00:29:08.460 | And don't forget, the tax benefit is just a deferral.

00:29:12.260 | Because if you eventually sell them,

00:29:14.020 | you're going to have to pay that very large capital gain.

00:29:17.620 | Because you're left with the stocks that

00:29:19.300 | had the biggest winners.

00:29:21.540 | So it is good.

00:29:22.980 | I am for it.

00:29:24.620 | I typically will have a client do that if, let's say,

00:29:28.820 | they want to donate some money a few years from now

00:29:32.780 | to a charity, to a donor-advised fund.

00:29:35.420 | So they could put $100,000, $200,000 in there,

00:29:38.540 | get the tax losses, be left with some stocks that

00:29:42.980 | have very large gains, and then donate it to a charity.

00:29:46.660 | The other option is they can always just take over

00:29:49.940 | the several hundred stocks that are left in the direct indexing

00:29:53.380 | and stop the fees.

00:29:54.340 | But then you're left with the complexity of a portfolio

00:29:57.580 | with hundreds of stocks.

00:29:59.340 | Over time, you don't have the tax losses to use.

00:30:03.140 | But you're left with all these stocks.

00:30:05.100 | And you have to pay fees on it if you want somebody

00:30:07.460 | to continue to manage it.

00:30:09.180 | I was talking with some people in the industry, though.

00:30:12.500 | Maybe there's a way to take those 250 to 500 stocks

00:30:17.540 | and convert it to ETF shares.

00:30:20.900 | Hasn't happened yet.

00:30:22.460 | But I'm talking with various people in the industry.

00:30:24.940 | And it sure would be great if you

00:30:28.740 | could take those 250 to 500 individual stocks,

00:30:32.260 | turn them into State Street, or Vanguard, or someone,

00:30:36.700 | and get issued shares of an ETF, of an S&P 500 fund.

00:30:41.940 | The cost basis of your shares would

00:30:43.540 | be the aggregate cost basis of the stocks that you have.

00:30:48.500 | But at least it could make it easier and make it more--

00:30:52.220 | you'd only have one security now instead of 250 to 500.

00:30:56.420 | And the IRS isn't missing out on anything here.

00:30:58.980 | So maybe, perhaps, somebody will figure out how to do that.

00:31:01.980 | And to me, it would make this direct indexing a little bit

00:31:05.020 | more palatable than currently what

00:31:09.060 | happens at the end of it all.

00:31:11.180 | I'd be a little surprised.

00:31:12.660 | I hadn't heard of that, by the way.

00:31:14.100 | But if I'm left with 280 stocks, I

00:31:17.740 | don't think the IRS is going to let me convert that to something

00:31:21.900 | that has all 500 without paying taxes on it.

00:31:26.060 | That would be my hunch.

00:31:27.380 | But I had not heard of that idea before.

00:31:30.220 | Yeah, it's just an idea.

00:31:31.180 | And it's just, again, you're not getting away

00:31:33.140 | with not paying taxes because your cost

00:31:35.140 | basis on the ETF shares that you were issued

00:31:37.860 | would be the total aggregate cost basis of the stocks

00:31:41.380 | that you currently held.

00:31:42.620 | So I've talked with numerous people in the industry

00:31:45.580 | about this idea.

00:31:46.340 | I think if that actually occurred,

00:31:49.260 | if you were able to actually do that

00:31:50.760 | at the end of this direct indexing,

00:31:53.020 | then it would make that whole concept much more popular.

00:31:56.380 | And I think it would be a trillion-dollar industry.

00:31:58.980 | But again, that was just an idea.

00:32:01.540 | And it's not there yet.

00:32:03.380 | So before we move on to the next topic,

00:32:06.220 | you are an hourly advisor.

00:32:07.500 | I have become an hourly advisor.

00:32:09.220 | So I can guess that's a trend of at least one.

00:32:12.180 | Do you think that this hourly model will continue to grow?

00:32:16.580 | Or do you think that the AUM model will continue to grow?

00:32:19.740 | Or maybe some other model like retainers or subscription-based

00:32:23.940 | is another model that might grow.

00:32:25.580 | What do you think the advisor industry and fees are going?

00:32:29.300 | Roughly, I think it was a year and a half, two years ago,

00:32:32.100 | I interviewed Bill McNabb when he was CEO of Vanguard.

00:32:35.200 | I asked him the question, will hourly take over?

00:32:38.380 | And I agree with his answer that it won't.

00:32:41.020 | It took a long, long time for people

00:32:44.700 | to move from the commission model

00:32:47.580 | to the more popular AUM model now,

00:32:50.460 | which is growing in popularity.

00:32:52.660 | And it would be a very long time before hourly would take over.

00:32:55.860 | I also think that people like paying

00:32:58.700 | in a painless sort of way.

00:33:01.580 | And the AUM model is a whole lot less painful

00:33:06.340 | than the hourly model.

00:33:08.120 | So yeah, I don't think that the hourly--

00:33:10.380 | I think it's going to gain in traction.

00:33:12.500 | But I think it will be the minority model for probably

00:33:15.900 | the rest of my life.

00:33:18.220 | What do you think about subscription-based, which

00:33:20.820 | is another way of billing?

00:33:22.420 | You've got financial planners out there

00:33:24.220 | that are charging between, let's say, $150 to $300 per month.

00:33:28.820 | You think it's good, that the problem that I have with that

00:33:31.620 | is the complexities vary all over the map.

00:33:35.860 | And it's the same sort of thing, that a good financial plan

00:33:39.500 | is lasting with rules going forward and not

00:33:42.940 | the need to keep paying.

00:33:45.180 | Let me ask you a question, and I'll

00:33:46.580 | get back to something I asked before,

00:33:48.140 | about the difference between managing money, an advisor who

00:33:51.500 | is managing money, and advisors who

00:33:54.820 | are doing just financial planning, or just advice,

00:33:57.100 | and then there are the ones who do both.

00:33:58.780 | What is your view of a fair fee for just the money management

00:34:03.940 | side, the percentage of the population who are delegators?

00:34:08.780 | They don't want to manage their own portfolios.

00:34:12.540 | They want somebody else to do the tax loss harvesting,

00:34:16.060 | do the tax management.

00:34:17.240 | They want to be able to call somebody up and say,

00:34:19.240 | send me a check for $10,000, or whatever.

00:34:21.980 | Do the tax allocation, and maintain the portfolios.

00:34:26.020 | What do you think a fair fee is for the advisor who's

00:34:29.860 | going to do that?

00:34:31.300 | I'd say no more than 0.3%, which is

00:34:34.860 | what Vanguard charges on their personal advisory services.

00:34:38.380 | Yes, if somebody doesn't want to think about it,

00:34:40.380 | doesn't want to do anything, then, yeah,

00:34:43.380 | an hourly planner is not the right choice,

00:34:46.580 | and an AUM planner is the better choice.

00:34:49.460 | And again, keeping fees ultra low,

00:34:53.780 | either through a robo-advisor that

00:34:56.820 | has the financial planning built in,

00:34:59.700 | or a Vanguard personal advisory service,

00:35:03.100 | which is a hybrid robo-model, I would argue.

00:35:06.140 | Fees have to stay very, very low.

00:35:09.740 | A lot of advisors, I think, kind of

00:35:12.460 | take shortcuts when trying to get people to invest with them.

00:35:16.620 | And I was in the advisory business for 30 years now,

00:35:19.220 | 10 years as a broker, and then 20 years

00:35:22.020 | with an AUM company that managed investment portfolios,

00:35:25.380 | and only now I'm going into hourly

00:35:26.980 | because they don't have that company anymore.

00:35:30.260 | A lot of advisors use these risk tolerance questionnaires

00:35:34.660 | and Monte Carlo simulation models.

00:35:37.500 | And a lot of these things that make

00:35:39.340 | it sound so sophisticated and scientific as to how

00:35:42.460 | they go about creating a portfolio

00:35:45.980 | and managing that portfolio.

00:35:48.540 | What do you think about all of these questionnaires

00:35:52.180 | and Monte Carlo simulation?

00:35:55.500 | I've written a couple of pieces.

00:35:56.940 | You know, the risk of taking risk profile questionnaires.

00:36:00.580 | You know, did Monte Carlo simulations fail?

00:36:03.620 | And first of all, on the questionnaires,

00:36:08.660 | typically when I take one, I get that I

00:36:11.420 | should be somewhere between 70% and 90% in stocks.

00:36:16.900 | And what they're doing is measuring my willingness

00:36:20.020 | to take risk at that moment.

00:36:22.940 | And after 10 years of a bull market,

00:36:24.900 | we all think we have a very high willingness to take risk.

00:36:29.620 | And then stocks plunge, and suddenly that willingness

00:36:33.060 | to take risk goes away.

00:36:35.660 | And the second, the biggest problem with these things

00:36:40.020 | is they don't measure one's need to take risk.

00:36:42.580 | You know, as our friend William Bernstein puts it,

00:36:44.780 | when you've won the game, quit playing.

00:36:46.420 | That doesn't mean 0% stocks, but take risk off the table

00:36:51.060 | so that they don't measure that.

00:36:53.740 | So in spite of being told I should be 70% to 90% in stocks,

00:36:58.260 | I'm 45% in stocks and not about to change.

00:37:02.980 | Regarding Monte Carlo simulation,

00:37:05.220 | I'm a big believer in Monte Carlo simulation, which

00:37:07.660 | actually came from a firm, McKinsey and Company,

00:37:09.940 | that I worked for a couple of decades or so ago.

00:37:13.740 | But the problem with Monte Carlo simulation are assumptions.

00:37:17.620 | And by the way, a Monte Carlo simulation

00:37:19.420 | is a model that runs 1,000 or more iterations of what

00:37:22.940 | asset classes might do and calculates the probability

00:37:26.740 | that you'll have enough to live out in retirement.

00:37:30.260 | Like any model that happens to be good--

00:37:32.260 | and I argue Monte Carlo simulation did not

00:37:34.300 | fail in 2008, 2009.

00:37:38.300 | It was the assumptions that went into the Monte Carlo simulation

00:37:42.580 | of incredibly high returns, very low volatility,

00:37:46.660 | because the planner's going to know when to get out

00:37:48.780 | of the market, and all sorts of false assumptions

00:37:52.060 | that went in there.

00:37:53.860 | So Monte Carlo simulations are good,

00:37:56.260 | but the assumptions have to be very real.

00:38:00.060 | I don't use questionnaires either.

00:38:02.180 | And a lot of these canned programs

00:38:05.260 | that financial planners use that have Monte Carlo simulations

00:38:08.460 | in it have a lot of garbage going in on the inside.

00:38:11.940 | They really do.

00:38:12.620 | So the advisor really needs to understand

00:38:15.700 | the dynamics of Monte Carlo simulation

00:38:18.100 | and make their own assumptions and make them realistic

00:38:20.980 | on the front end so they can get something useful

00:38:22.980 | on the back end.

00:38:23.660 | But I don't think that occurs 9 out of 10 times.

00:38:26.420 | Yeah, probably 99 out of 100.

00:38:28.540 | Yeah, I've looked at several different financial planning

00:38:31.580 | pieces of software and ultimately decide

00:38:33.940 | I'm doing my own financial planning

00:38:35.460 | and not using any of their software.

00:38:38.300 | I want to now turn to some investment questions that

00:38:41.620 | were posed on the Bogleheads forum specifically for you,

00:38:46.180 | because you've had written about and talked

00:38:49.300 | about various asset classes.

00:38:52.220 | And I want to go over some of those asset classes

00:38:55.380 | or investments with you.

00:38:57.180 | And you could give us your current views.

00:39:01.260 | Let's start with municipal bonds.

00:39:04.700 | What are your views on the state of the municipal bond market?

00:39:08.700 | And if someone was to be a municipal bond investor,

00:39:11.820 | what would you recommend?

00:39:14.900 | Yeah, first of all, never buy the muni bonds directly.

00:39:20.780 | The bid-ask spreads of muni bonds

00:39:22.940 | can easily be in the 1% to 3% category.

00:39:26.860 | The largest spread I've ever seen was 10.25%.

00:39:31.700 | And my client, by the way, happened

00:39:33.300 | to be an attorney with the Securities and Exchange

00:39:35.540 | Commission in Washington, DC.

00:39:37.820 | Had no clue about that.

00:39:39.900 | And then on individual muni bonds,

00:39:43.180 | even in Vanguard statements, if you look at the yield,

00:39:46.180 | that yield includes the amortization of premium,

00:39:49.540 | which is really paying back your own principal.

00:39:53.380 | So if you're going to buy a muni bond,

00:39:55.500 | I would buy an ultra-low-cost muni bond fund,

00:39:59.180 | like the Vanguard Intermediate Term Tax Exempt Fund.

00:40:02.820 | With that said, I own a little bit of it.

00:40:05.700 | I do not let my clients put more than 20% of their fixed income

00:40:11.060 | in that fund.

00:40:12.580 | And the reason is that even after a 10-year bull stock

00:40:16.900 | market, municipalities and states,

00:40:19.260 | their pensions still have, according to Moody's, $1.6

00:40:22.820 | trillion worth of unfunded pension liabilities.

00:40:27.500 | And there are actuarial assumptions

00:40:31.180 | with about a 7%, 7.5% return, which I think are aggressive.

00:40:36.700 | So that if stocks don't do very well over the next decade,

00:40:42.220 | and especially if stocks decline over the next decade

00:40:46.380 | as baby boomers retire, there's going

00:40:49.300 | to be a lot of stress on those municipalities.

00:40:52.380 | And there could be some systemic defaults,

00:40:55.100 | a new correlation to stocks that had never happened before.

00:40:58.660 | So I'm OK with low-cost muni bond funds to a limited degree.

00:41:04.660 | Munis represent about 10% of investment-grade bonds.

00:41:08.100 | And I don't let my clients go more than twice

00:41:10.820 | that allocation to 20%.

00:41:13.060 | OK, next question.

00:41:14.780 | International bonds and international bond funds,

00:41:17.400 | what are your current views on adding these to a portfolio?

00:41:20.980 | I think they're OK.

00:41:22.680 | I generally don't recommend them.

00:41:24.260 | I own a tiny little bit myself.

00:41:26.100 | When Vanguard launched its international bond fund,

00:41:30.580 | they asked me to write about it.

00:41:31.940 | I did, and I kind of gave it a ho-hum recommendation.

00:41:35.020 | First of all, never buy an expensive international fund,

00:41:38.340 | and never buy an unhedged international bond fund.

00:41:42.460 | An unhedged international bond fund

00:41:44.260 | is going to behave very much like a foreign currency fund.

00:41:48.540 | But the problem with the Vanguard fund,

00:41:50.700 | although it's very good and it's the best international bond

00:41:54.240 | fund out there, is it's A, more expensive,

00:41:57.340 | and B, it doesn't include the cost of the currency hedging.

00:42:01.060 | And I understand their argument that international bonds

00:42:05.000 | are the single largest of the four categories--

00:42:07.540 | US stocks, international stocks, US bonds, international bonds.

00:42:12.180 | And I'm a believer in diversification.

00:42:14.140 | But let's face it.

00:42:15.660 | If the US government goes out of business

00:42:18.620 | and the US government issues the vast majority

00:42:20.620 | of the investment-grade bonds, then all of our portfolios

00:42:23.620 | will fail.

00:42:24.460 | So I think there's less importance there.

00:42:26.460 | But if somebody wants the international bond fund,

00:42:30.260 | the Vanguard one, I'm fine with them keeping it or buying some.

00:42:34.140 | I think you and I have similar views on the fund.

00:42:36.260 | It's like, if you already have it or if you want it, fine.

00:42:38.680 | But it's not something I would recommend in a portfolio.

00:42:42.140 | But if you have it or you want it, it's OK.

00:42:45.140 | Next question, and this is going to be your favorite one,

00:42:47.480 | I think--

00:42:48.100 | equity index annuities.

00:42:50.060 | You're a big fan, I hear.

00:42:52.180 | Oh, yes.

00:42:52.780 | Yes, all the upside of the market, no downside risk.

00:42:56.420 | Yeah, I've written about these extensively.

00:42:59.660 | And you have to give them the smell test.

00:43:02.060 | How can somebody give you the upside of the market,

00:43:04.580 | no downside risk?

00:43:05.940 | You reverse engineer it.

00:43:07.620 | You look at the portfolio of the insurance company offering it.

00:43:12.220 | And you can see that they're 80% to 90% in bonds.

00:43:17.140 | And 10% to 20% in stocks, in real estate, other investments

00:43:21.460 | that you could have bought directly.

00:43:23.020 | So what you're doing is buying the portfolio indirectly,

00:43:27.060 | paying the agent who's making 10% when you buy the product,

00:43:32.500 | making money for the insurance company,

00:43:34.740 | covering their overheads, et cetera.

00:43:37.100 | It's not going to deliver what it says.

00:43:39.420 | There are all sorts of tricks.

00:43:40.900 | Caps, the S&P 500 index, strip of dividends.

00:43:44.740 | The one I just saw was sold at a much higher rate.

00:43:48.060 | But they had subsequently, after the client bought it,

00:43:51.560 | lowered the maximum return to 4%.

00:43:55.220 | So they're going to earn somewhere between 0% and 4%.

00:43:58.940 | The money is locked up.

00:44:00.980 | They're going to get less than what they could have gotten

00:44:03.380 | on buying a treasury fund.

00:44:05.460 | Not a good deal.

00:44:06.980 | So basically what you're saying, it

00:44:08.380 | doesn't pass what you call your reasonableness test.

00:44:13.780 | What is your reasonableness test?

00:44:15.820 | It's reverse engineering.

00:44:17.900 | I call it the smell test.

00:44:19.860 | How are they going to deliver what they're promising to you?

00:44:23.500 | How do they make money off of it?

00:44:25.300 | How can they own a mostly bond and a little stock portfolio

00:44:29.460 | and give you all the upside of the market, no downside risk?

00:44:32.900 | Reverse engineer it.

00:44:34.940 | What's in it for them?

00:44:35.900 | They're not doing it because they're

00:44:38.260 | charitable organizations trying to make you rich.

00:44:40.660 | It's like the call that you get trying to sell you the oil well

00:44:46.500 | partnership that has never had a dry well in their 20 years.

00:44:49.500 | Why the heck are they calling you?

00:44:50.920 | Why wouldn't their current investors want to be getting in?

00:44:53.620 | Common sense is not all that common.

00:44:55.940 | The last thing about the smell test is, not always,

00:44:59.860 | but roughly 99% of the time that I've

00:45:02.460 | heard something that just sounds too good to be true,

00:45:05.700 | it usually is.

00:45:08.460 | But not all insurance type products for investing are bad.

00:45:13.940 | Let's take a single premium immediate annuity.

00:45:17.300 | There's been a lot of good things

00:45:18.660 | written about some people using those.

00:45:21.220 | Would you agree?

00:45:23.540 | Yeah, I think it's certainly the best of all the insurance

00:45:28.220 | company annuities.

00:45:29.340 | That's when, let's say, you pay a million dollars

00:45:33.140 | and the insurance company turns around

00:45:36.420 | and they say they're paying you $60,000 a year in income

00:45:40.740 | for the rest of your life.

00:45:42.780 | So it's not a bad product, but it's not income,

00:45:46.340 | if you think about it.

00:45:47.260 | If you do the math, that million dollar $60,000 example,

00:45:51.500 | it's not income because you have to live over 16 years just

00:45:54.540 | to get your principal back.

00:45:56.780 | Number two, it typically doesn't have an inflation adjustment.

00:46:01.260 | There's only one company that I know of that does,

00:46:03.660 | and that's Principal.

00:46:04.700 | And of course, that really lowers the amount

00:46:07.500 | that you get paid.

00:46:09.420 | So if you're doing a SPIA that pays a flat amount,

00:46:14.380 | you're getting less and less spending power every year.

00:46:18.100 | But it's certainly not a horrible investment.

00:46:20.580 | And two annuities I often recommend

00:46:24.020 | are, number one, delaying Social Security.

00:46:27.260 | That's the best deferred annuity on the planet

00:46:29.980 | because it's a government-sponsored,

00:46:33.020 | inflation-adjusted annuity.

00:46:35.660 | And then second, roughly 75% of the time

00:46:38.740 | I do an analysis of somebody that

00:46:41.220 | is retiring with a pension, it comes out

00:46:44.260 | better to take the payment than to take the lump sum

00:46:49.220 | and roll it over to the IRA.

00:46:51.060 | And when you think about both of those examples,

00:46:53.420 | no commissions are being paid.

00:46:55.380 | No insurance company is making a profit

00:46:57.980 | and covering their overhead.

00:46:59.580 | So those are probably the best two annuities on the planet.

00:47:03.300 | Good answer, Alan.

00:47:04.140 | Thanks.

00:47:04.660 | And by the way, I did interview Mike Piper, as you know,

00:47:07.540 | for Bogleheads on Investing.

00:47:09.060 | And he talked all about the benefits

00:47:13.500 | of delaying Social Security.

00:47:15.620 | That was a great podcast.

00:47:17.740 | Alan, I had one Boglehead who is in the Thrift Savings

00:47:21.180 | Plan, which is the government plan for like a 401(k)

00:47:25.700 | for government employees in the military.

00:47:29.140 | He's going to be retiring soon and wants

00:47:30.860 | to know your thoughts about leaving the money in the plan

00:47:33.500 | rather than taking it out or rolling it into an IRA.

00:47:37.460 | Well, let me say I've been on federal news radio many times.

00:47:42.180 | And once I joked, will somebody hire me

00:47:45.700 | into a government agency, pay me $1,

00:47:48.860 | give me enough time to roll my IRAs into the Thrift Savings

00:47:52.900 | Plan, and then you can fire me?

00:47:54.740 | It is that good.

00:47:55.940 | I wish I had access to the Thrift Savings Plan.

00:47:59.220 | I love the simplicity.

00:48:01.020 | I love the ultra-low costs.

00:48:03.980 | But really what I love the most is the G Fund.

00:48:07.500 | That's a bond issued by the Treasury

00:48:10.540 | only for US government employees.

00:48:13.900 | And what it does is gives you an intermediate term bond rate

00:48:19.340 | without the downside if interest rates go up.

00:48:22.060 | It's a stable value sort of thing.

00:48:24.380 | And because a tax-deferred account

00:48:26.740 | is the perfect place to hold bonds,

00:48:30.060 | and that's a superior bond, I love it.

00:48:33.340 | I wish I had access to it.

00:48:35.660 | So hopefully that answers the question,

00:48:37.820 | don't take your money out.

00:48:39.900 | Probably does.

00:48:40.660 | And I always wondered why other governments don't

00:48:44.940 | copy the Thrift Savings Plan with their own 403(b) plans.

00:48:49.460 | I mean, the 403(b) plans, I've seen

00:48:51.300 | some of the most horrible investment choices,

00:48:53.540 | such high cost.

00:48:54.980 | I wish some of these trustees on these 403(b) plans

00:48:58.380 | for medical professionals and for teachers

00:49:00.820 | would just look at the federal government's Thrift Savings

00:49:04.740 | Plan and copy it and save their participants ungodly amounts

00:49:09.580 | of money over time.

00:49:11.260 | Well, when I help a client's company set up a 401(k)

00:49:15.460 | or move a 401(k), I try to design it

00:49:17.860 | after the Thrift Savings Plan.

00:49:19.420 | But I don't have access to a G Fund type of security.

00:49:23.980 | OK, got it.

00:49:24.780 | I've got a question now from a Boglehead

00:49:28.740 | who has been listening to you and reading your stuff

00:49:32.220 | and thinks you're great.

00:49:34.220 | And he wants to get into the industry.

00:49:36.740 | So if somebody out there decides they

00:49:39.180 | want to do the right thing for clients,

00:49:40.860 | and they like what they're hearing on these podcasts,

00:49:43.780 | they like what you're saying, and they

00:49:45.420 | want to get into the industry, would you

00:49:49.740 | recommend they do that?

00:49:51.660 | What advice would you give somebody

00:49:53.260 | who makes a kind of a mid-career change

00:49:56.460 | to get into the financial advisory industry?

00:50:02.460 | That's a tough question.

00:50:04.580 | I got into the hourly business only

00:50:07.300 | after a couple of decades of corporate finance

00:50:10.940 | and living frugally.

00:50:12.500 | So I didn't need to make a whole lot of money my first year.

00:50:16.260 | And my first year, by the way, my total revenue was $500.

00:50:20.660 | So probably, if they've got a family, kids to send

00:50:23.540 | to college, et cetera, the best advice

00:50:26.220 | is to go to work for an AUM financial advisor,

00:50:31.820 | kind of learn the business, and then

00:50:34.540 | decide whether or not they want to go out on their own.

00:50:37.460 | As you know, I'm an advocate of the hourly model.

00:50:40.020 | But it's very hard for somebody who

00:50:42.180 | needs to make a living to just start a practice

00:50:45.100 | on the hourly model.

00:50:47.620 | I started in the brokerage world for 10 years

00:50:50.220 | to learn the business.

00:50:51.780 | And that's where I received my CFA charter

00:50:54.540 | and ended up getting my master's of science and finance.

00:50:58.460 | And then I left after 10 years of learning the industry

00:51:01.540 | and getting my education to go out and start

00:51:03.980 | my own company managing money.

00:51:07.100 | And after that, for 20 years now,

00:51:08.600 | I'm going out and doing hourly.

00:51:10.220 | So I agree with you that doing hourly

00:51:12.860 | is very difficult if you're just going to go out of the block,

00:51:15.500 | just getting in the industry and doing hourly.

00:51:18.300 | That doing something else to get some experience

00:51:20.980 | is generally going to be helpful.

00:51:23.780 | Yeah, incentives matter, by the way.

00:51:25.620 | If paying my kids college tuition

00:51:28.740 | were dependent upon me selling you

00:51:30.380 | that annuity in your IRA with all the upside of the market,

00:51:34.180 | no downside risk, I would do it.

00:51:36.020 | I would think I'm a force for good.

00:51:37.640 | And I would think that you and Alan just don't understand it.

00:51:42.700 | You'll be sorry when stocks plunge.

00:51:45.620 | Alan, let me ask you one final question.

00:51:47.820 | Could you give us your list of what investors

00:51:50.660 | should be looking for when they go to hire an advisor?

00:51:55.500 | Meet with the advisor.

00:51:57.220 | See what it is they're offering to do for you.

00:52:00.580 | If they're telling you they're going to beat the market, run.

00:52:04.100 | But meet with the advisor.

00:52:06.620 | Listen to him or her, what they're saying.

00:52:09.060 | Are they trying to move you from complexity to simplicity?

00:52:12.300 | That's a good thing.

00:52:14.020 | A good advisor can help you build the right asset

00:52:16.820 | allocation for the amount of risk that you want to take.

00:52:20.340 | They can help you maximize that diversification,

00:52:24.100 | minimize the fees.

00:52:26.580 | They can provide discipline to stay the course.

00:52:29.020 | And as I think I mentioned, advisors as a whole,

00:52:32.540 | time markets probably as poorly as individuals, if not worse.

00:52:37.740 | I've always said that investing is simple.

00:52:39.520 | I never said tax is worse.

00:52:40.900 | So maximize that tax efficiency.

00:52:44.380 | Help you on retirement planning, which assets to spend first.

00:52:48.580 | Quite frankly, in retirement, if you

00:52:50.940 | delay social security, which is typically

00:52:53.660 | the thing to do in Mike Piper's open social security

00:52:57.660 | calculator, is absolutely wonderful.

00:52:59.940 | And they can sell stocks with a long-term capital gain

00:53:03.700 | at a 0% tax rate, things like that.

00:53:06.020 | Help them understand risk management.

00:53:10.300 | A good advisor needs to argue with you

00:53:12.580 | and push back when they don't agree with you.

00:53:15.700 | So those are things that a good advisor can do.

00:53:18.700 | So meet with the advisor.

00:53:20.120 | See what it is they're suggesting to do.

00:53:22.660 | And then always ask, what are the total fees

00:53:25.620 | that I'll be paying?

00:53:27.300 | And just one last thing.

00:53:28.940 | The advisor you're thinking of hiring

00:53:31.660 | needs to be willing to be the bad guy,

00:53:33.940 | to help get you out of where you are.

00:53:37.020 | Because sometimes firms don't like losing money.

00:53:41.500 | And there needs to be a lot of pushback

00:53:43.500 | to get them to move forward.

00:53:48.700 | That's great advice, Alan.

00:53:50.500 | Thank you for being on Bogleheads on investing today.

00:53:52.980 | We really appreciate you giving us your insights.

00:53:55.940 | It's been a wonderful talk.

00:53:57.540 | Good luck with your practice.

00:53:59.060 | Thank you, Rick.

00:54:00.580 | This concludes the eighth episode

00:54:02.420 | of Bogleheads on investing.

00:54:04.460 | I'm your host, Rick Ferry.

00:54:06.700 | Join us each month to hear a new special guest.

00:54:10.060 | In the meantime, visit bogleheads.org

00:54:13.420 | and the Bogleheads Wiki.

00:54:15.140 | Participate in the forum and help others find the forum.

00:54:19.420 | Thanks for listening.

00:54:21.620 | [MUSIC PLAYING]

00:54:24.980 | [MUSIC PLAYING]

00:54:28.340 | [MUSIC PLAYING]

00:54:31.700 | you

Bogleheads® on Investing Podcast 008 – Allan Roth, host Rick Ferri (audio only)

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