Bogleheads® on Investing Podcast 047: Michael Kitces, Nicole Boyson -The Investment Adviser Industry

00:00:00.000 | (upbeat music)

00:00:02.580 | - Welcome everyone to the 47th edition

00:00:13.080 | of Bogleheads on Investing.

00:00:15.560 | Today we talk about the evolution

00:00:17.080 | of the investment advisor industry

00:00:19.120 | with two special guests, Michael Kitsis,

00:00:22.360 | head of planning strategy for Buckingham Wealth Partners

00:00:25.360 | and Dr. Nicole Boysen, finance department chair

00:00:28.220 | at Northeastern University's

00:00:30.000 | D'Amore McKim School of Business.

00:00:32.380 | Hi everyone, my name is Rick Ferry

00:00:44.040 | and I'm the host of Bogleheads on Investing.

00:00:46.480 | This episode, as with all episodes,

00:00:48.660 | is brought to you by the John C. Bogle Center

00:00:51.120 | for Financial Literacy,

00:00:52.920 | a 501(c)(3) nonprofit organization

00:00:55.820 | dedicated to helping people make better financial decisions.

00:00:59.040 | Visit our newly designed website at boglecenter.net

00:01:02.840 | to find valuable information

00:01:04.840 | and to make a tax-deductible contribution.

00:01:07.600 | And don't forget about our Bogleheads Conference

00:01:10.520 | coming up this October 12th through the 14th,

00:01:13.760 | featuring many speakers that I've had on this podcast

00:01:16.840 | and more.

00:01:17.740 | There are a few seats remaining,

00:01:19.720 | you don't wanna miss out.

00:01:20.880 | Visit boglecenter.net for more information.

00:01:24.800 | In this episode of Bogleheads on Investing,

00:01:27.100 | we're going to be talking about the evolution

00:01:29.920 | of the investment advisor industry

00:01:32.520 | and some of the conflicts of interest that exist

00:01:35.400 | with two special guests.

00:01:37.220 | Our first guest is Michael Kitsis,

00:01:39.700 | one of the most prominent thought leaders

00:01:41.440 | in the financial services industry.

00:01:43.720 | He is the head of planning strategy

00:01:45.620 | at Buckingham Wealth Partners,

00:01:47.840 | the co-founder of XY Planning Network

00:01:50.520 | and among other companies.

00:01:51.920 | He is the host of the Financial Advisor Success Podcast

00:01:55.320 | and the publisher of the Kitsis Report newsletter

00:01:58.480 | and the Nerd's Eye View blog at kitsis.com.

00:02:02.040 | Our second guest is Dr. Nicole Boyson.

00:02:04.400 | She is the chair of the finance department

00:02:06.760 | of Northeastern University's

00:02:08.160 | D.R. Moore McKim School of Business.

00:02:10.660 | She's also serves as the co-editor

00:02:12.960 | for the Financial Analyst Journal

00:02:14.740 | and is on the board of directors

00:02:16.800 | for the Eastern Finance Association.

00:02:19.400 | Her research focuses on institutional investors

00:02:22.520 | with current interests on investment advisors.

00:02:25.480 | Her paper that we'll be discussing today

00:02:27.200 | is titled "The Worst of Both Worlds,

00:02:30.280 | Dual-Registered Investment Advisors."

00:02:33.560 | So with no further ado,

00:02:35.480 | I'm pleased to have with us today Michael Kitsis.

00:02:38.720 | Welcome to the Bogleheads on Investing Podcast, Michael.

00:02:41.560 | Thank you, Rick.

00:02:42.400 | Great to be here.

00:02:43.220 | I appreciate the opportunity.

00:02:44.360 | It's a real pleasure to have you

00:02:45.560 | because you are the leader out there

00:02:48.720 | in the advisor community, bar none.

00:02:51.400 | You're the voice, so to speak,

00:02:53.320 | and rightly so on your blog,

00:02:56.680 | on Nerd's Eye View,

00:02:58.040 | and on your website, kitsis.com,

00:02:59.920 | for mostly advisors in the advisor community.

00:03:02.720 | I know we have a good number of Bogleheads

00:03:04.540 | that come over and read as well.

00:03:06.280 | We appreciate some of it circulates there

00:03:08.680 | in hopefully helpful ways

00:03:10.200 | for everybody who's reading it for themselves.

00:03:11.960 | The information you put out there,

00:03:13.940 | everything from taxes to insurance

00:03:18.200 | to trust work.

00:03:19.320 | I mean, certainly very, very helpful

00:03:21.720 | to individual investors

00:03:23.400 | and very helpful to advisors.

00:03:24.680 | I mean, I've learned a lot by reading your information

00:03:27.560 | and watching you on videos

00:03:29.800 | and also in person at various conferences.

00:03:32.320 | And by the way,

00:03:33.160 | how many conferences are you doing a year now?

00:03:35.920 | Oh man, well, historically it was 50 to 70 events

00:03:39.280 | that I was out for in person.

00:03:41.240 | I'm still doing about that many,

00:03:43.080 | but not everything's in person on the road anymore.

00:03:46.640 | It's more of an even split between in-person

00:03:49.280 | and lots of webinars and virtual broadcasts and live streams

00:03:52.880 | 'cause that seems to be our post-pandemic era.

00:03:55.800 | Sure, well, that's fantastic.

00:03:58.400 | Okay, so let's get first into,

00:04:01.080 | how did Michael Kitsis become michaelkitsis.com,

00:04:05.160 | Nerd's Eye View?

00:04:07.040 | Tell us the story of your life.

00:04:10.120 | Yeah, the story of my life.

00:04:11.840 | So I was born and raised in the Washington DC area.

00:04:14.840 | I was the son of two computer scientists.

00:04:17.200 | So like nerding out on computers and technical stuff

00:04:19.720 | from a very early age.

00:04:20.840 | I was hacking my own computer games on my Commodore 64

00:04:24.080 | when I was six years old.

00:04:25.680 | Probably kind of dates me a little.

00:04:27.520 | I went to college in the sort of classic

00:04:29.760 | New England liberal arts experience.

00:04:31.640 | Like, you know, we teach you to critically think,

00:04:33.520 | but prepare you for nothing in particular.

00:04:35.440 | Fruitful adults.

00:04:36.960 | You know, I went to college as a psychology major,

00:04:39.280 | theater minor, pre-med student.

00:04:41.120 | And the only thing I figured out by the end of college

00:04:43.360 | that I did not wanna do psychology, theater, or medicine.

00:04:46.200 | So I was getting ready to graduate and needed a job

00:04:49.680 | and landed somewhat randomly

00:04:52.940 | in the financial services industry.

00:04:55.440 | Well, before we get to that,

00:04:56.600 | I wanna circle back to college,

00:04:57.880 | because I remember you and I were at a conference together

00:04:59.880 | one time and we were walking around

00:05:02.480 | and we came across this big hall

00:05:04.900 | and they were doing ballroom dancing.

00:05:06.640 | Yes.

00:05:07.480 | And you turned to me and you said,

00:05:09.160 | "That was me, I did that in college."

00:05:11.920 | Yes, yeah, so I was co-captain

00:05:14.240 | of the college ballroom dancing society.

00:05:17.000 | And like, this was way before Dancing With The Stars.

00:05:20.520 | Like, this is all the way back in the 1990s.

00:05:23.160 | And yeah, I did a lot of competitive ballroom dancing

00:05:26.320 | throughout college.

00:05:27.480 | And then after graduation,

00:05:29.640 | took lessons and was hardcore into it.

00:05:31.840 | And then 10 years later got married

00:05:33.880 | and now have been married for 11 years.

00:05:35.880 | So unfortunately, very little time for it these days.

00:05:38.860 | Like, life got very busy.

00:05:41.760 | Obviously, you didn't become

00:05:42.960 | a professional ballroom dancer.

00:05:44.700 | You ended up somehow in the financial services industry.

00:05:47.520 | So could you tell us, how did that happen?

00:05:50.120 | My grandfather, my mother's father passed away

00:05:52.720 | when she was fairly young.

00:05:54.720 | And so my grandmother suddenly found herself

00:05:58.560 | the young widowed single mother of two young girls

00:06:02.800 | and needed to provide for them.

00:06:04.120 | And so all the way back in the 1960s,

00:06:06.400 | she went and had to get a job.

00:06:08.320 | And she ended up getting a job as an assistant

00:06:10.680 | for a life insurance salesman

00:06:12.240 | from the New England Life Insurance Company.

00:06:14.560 | Did that for many, many years

00:06:15.920 | as my mother and my aunt grew up.

00:06:17.840 | And when my mother got married

00:06:20.160 | shortly after college to my father,

00:06:22.080 | the insurance agent has this moment of,

00:06:24.120 | what do you give your secretary's daughter

00:06:27.720 | when she's getting married?

00:06:29.820 | A life insurance policy,

00:06:31.080 | 'cause he was a life insurance salesman.

00:06:32.640 | So he gives my father a life insurance policy.

00:06:36.060 | Fast forward 20 plus years,

00:06:38.000 | like my grandmother is retired.

00:06:39.920 | This life insurance agent has retired.

00:06:42.280 | I am now like getting ready to graduate from college.

00:06:44.880 | And my father gets a phone call

00:06:46.640 | from a New England life insurance agent

00:06:49.080 | that says, Mr. Kitsis,

00:06:50.120 | like you have a life insurance policy with us.

00:06:51.840 | You've had it for many, many years.

00:06:53.040 | It looks like no one's been out to see you

00:06:54.240 | in a long, long time 'cause the original agent has retired.

00:06:57.360 | Someone should come out and review the policy.

00:06:59.520 | So the agent comes out and reviews the policy.

00:07:02.120 | And then at the end of the meeting,

00:07:03.480 | the insurance agent kind of takes off

00:07:05.160 | his insurance agent hat and puts on his sales manager hat

00:07:07.840 | 'cause he was also the recruiter for the local office.

00:07:09.840 | And said, by the way,

00:07:11.040 | now that we reviewed the policy,

00:07:12.080 | like I just wanted to ask,

00:07:13.280 | do you know anybody who might be wanting

00:07:14.840 | to come into the industry because our company's hiring?

00:07:17.040 | My father said, funny thing.

00:07:18.900 | My son's about to graduate from college.

00:07:20.440 | He has no idea what he wants to do with his life.

00:07:23.040 | I come home on spring vacation.

00:07:24.360 | My father's like, great news.

00:07:25.680 | I got you an interview 'cause you need to figure out

00:07:27.680 | what you're gonna do when you're graduating

00:07:29.000 | 'cause you're not coming back here.

00:07:30.680 | And so I interviewed for the insurance company,

00:07:33.400 | got the job.

00:07:34.740 | As I learned many years later,

00:07:36.400 | was probably less my wonderful potential

00:07:38.940 | as a strong student and willing to work hard

00:07:41.700 | and a lot more of the zip code that my parents lived in.

00:07:45.860 | They were hoping that my parents

00:07:47.280 | were from a fairly affluent neighborhood

00:07:48.940 | where I would know people with money

00:07:50.640 | to whom I could sell life insurance.

00:07:52.640 | Unfortunately for them, what they didn't realize

00:07:55.100 | was my parents moved to that neighborhood in the '70s

00:07:58.000 | before there was any money in that neighborhood.

00:08:00.600 | I did not have any natural market

00:08:02.580 | of like my parents, friends, and family

00:08:04.360 | that I was supposed to sell life insurance to,

00:08:06.040 | which made that very challenging.

00:08:07.920 | Well, let me read something that you put on your website

00:08:10.800 | about that job, which I found striking.

00:08:13.760 | And it goes right into

00:08:14.920 | what we're gonna be talking about today.

00:08:16.740 | You wrote, "When I started my career

00:08:18.520 | "as a financial advisor more than 30 years ago,

00:08:21.160 | "I couldn't believe the company that hired me

00:08:23.940 | "will let me put financial advisor on my business card.

00:08:28.180 | "The reality was I didn't actually know anything

00:08:31.160 | "about giving financial advice or economics or money."

00:08:34.600 | I was a psych major, theater minor.

00:08:36.920 | But this is the way it was.

00:08:39.340 | And in many cases, I mean, I guess I'll ask you this now.

00:08:43.280 | I mean, it still is that way.

00:08:45.180 | It still is for a lot of the industry.

00:08:47.160 | Right, like at the end of the day,

00:08:48.760 | they put financial advisor on my business card.

00:08:51.040 | My job was not to give advice, which frankly was good

00:08:53.360 | 'cause I didn't know anything about money.

00:08:54.880 | I didn't go to school for that.

00:08:55.800 | I didn't learn anything.

00:08:57.160 | My training was how to sell the company's

00:08:58.880 | variable universal life policy,

00:09:00.400 | 'cause that was the kind of the big thing

00:09:02.180 | back in the late 1990s.

00:09:04.040 | Like it was sales training

00:09:05.320 | because I wasn't a financial advisor.

00:09:06.840 | I was an insurance salesperson.

00:09:08.400 | It was a nice euphemism on my business card

00:09:10.200 | to say financial advisor, but I was a salesperson.

00:09:12.920 | I was literally paid on commission

00:09:14.080 | to sell the insurance policies.

00:09:16.640 | And like that distinction,

00:09:19.140 | the term financial advisor is used very, very widely.

00:09:22.520 | Some people who use it literally

00:09:24.160 | are in the business of advice.

00:09:25.320 | Like they get paid for advice

00:09:26.720 | and they charge fees for advice and they receive advice.

00:09:30.400 | But we also still continue to hire people in the industry.

00:09:33.840 | We call them financial advisors,

00:09:35.600 | but they're salespeople.

00:09:37.200 | - That used to be 90% of the industry.

00:09:39.240 | 90% of the industry was you're being hired to sell.

00:09:43.360 | I mean, when I came out of the military,

00:09:44.820 | I didn't know anything either.

00:09:46.000 | They hired me because I might be able to recruit veterans.

00:09:48.720 | - Yep, natural market, yes.

00:09:51.420 | - And I was a pilot, so go after the pilots.

00:09:53.760 | That's why they recruited me.

00:09:54.960 | And I thought I was being recruited

00:09:56.400 | because I was financially savvy.

00:09:58.400 | I mean, I did run an antiques business

00:10:00.040 | when I was in college, so it must be sort of related.

00:10:03.360 | - I thought the same thing.

00:10:04.340 | Like I had good grades.

00:10:05.480 | I was a hard worker.

00:10:06.320 | I was like, no, I was hired for the zip code

00:10:08.040 | that my parents lived in.

00:10:09.080 | - But at least to your credit,

00:10:10.600 | you realized that and you began on this other career.

00:10:13.840 | - Yeah, I mean, it didn't take long for me,

00:10:16.160 | like literally into the first year,

00:10:18.200 | sitting with the prospect in their home,

00:10:20.520 | across them on their kitchen table,

00:10:22.440 | talking to him about quote financial advice,

00:10:24.640 | which was basically selling him

00:10:25.840 | a variable universal life policy.

00:10:27.680 | He had accumulated about $300,000,

00:10:30.800 | pretty darn good amount of money 20 plus years ago.

00:10:33.440 | He was already well into his fifties.

00:10:34.800 | He wanted to retire in 10 years.

00:10:36.120 | He was trying to figure out how to get from here to there.

00:10:38.040 | And you know, it was like, this is what I've got.

00:10:41.200 | Like, what do I do?

00:10:42.100 | What do I do for the next 10 years

00:10:44.000 | to get from here to there so I can retire?

00:10:46.600 | 'Cause I'm kind of, you know,

00:10:47.440 | he was in a practice that was burning him out.

00:10:50.400 | And I remember sitting across from him and was like,

00:10:53.880 | I have no fricking idea what you should do.

00:10:56.960 | I'm a psych major theater minor

00:10:58.800 | who just got trained in one type of product

00:11:01.200 | that I'm supposed to sell you

00:11:02.360 | because it's literally supposed to be the answer

00:11:04.240 | to every single person I sit across from.

00:11:06.680 | And I'm just supposed to do that for enough people

00:11:08.800 | that eventually some of them say yes inevitably.

00:11:12.120 | And like, I mean, just we're taught in the industry,

00:11:13.560 | like it's a quote game of numbers.

00:11:15.120 | If you just pitch your thing to enough people,

00:11:17.160 | eventually some of them will say yes

00:11:18.800 | and you'll get to a sale.

00:11:20.320 | And just like this crisis moment for me of,

00:11:24.160 | my God, like this is literally

00:11:25.920 | his financial life on the line.

00:11:27.560 | And I have no fricking idea what I'm talking about.

00:11:30.200 | And I probably should.

00:11:32.440 | And so that took me down.

00:11:33.840 | Now, granted, I perhaps went a little overkill on it.

00:11:36.600 | Like I got my CFP certification

00:11:38.540 | and then a master's degree in financial planning

00:11:40.320 | and then five more professional designations

00:11:41.960 | than the second master's degree in taxation.

00:11:43.640 | So granted, I maybe went like a little bit off the deep end

00:11:46.680 | in that dynamic once I went down that path.

00:11:50.240 | But just, I mean, to me, like, look, financial advice is,

00:11:54.360 | I really view as a sacred duty.

00:11:56.880 | And like, I'm not trying to be melodramatic.

00:11:58.760 | Like literally people's lives can be destroyed

00:12:02.360 | by finances, money problems are the number one cause

00:12:05.960 | of divorce and marital strife.

00:12:08.120 | It's a very common issue tied to suicide.

00:12:10.280 | Just in general, people with more access to wealth

00:12:12.880 | tend to have better life expectancies

00:12:14.680 | and better health outcomes because of the accessibility

00:12:17.160 | that wealth creates to medical care.

00:12:19.520 | Like people's lives and livelihood

00:12:22.640 | are literally on the line.

00:12:24.240 | Like you can't screw around with that.

00:12:27.120 | - You have a conscience, that's the problem.

00:12:29.760 | - Yes, and for whatever it's worth,

00:12:31.520 | I did not get the sale that day.

00:12:34.000 | He didn't buy.

00:12:36.160 | - Let's start out the conversation

00:12:38.400 | with the evolution of the advisor industry.

00:12:43.400 | You've given talks on this, I've listened to your talks.

00:12:47.840 | I think they're very good.

00:12:48.760 | And you go through four phases.

00:12:50.880 | You think we're in the fourth phase now.

00:12:53.160 | So why don't you go ahead and tell us

00:12:54.960 | how you see the evolution of the industry.

00:12:57.800 | And by the way, I've been in it for 35 years.

00:12:59.400 | So I lived the evolution.

00:13:00.360 | - Yeah, you've lived most of these transitions.

00:13:02.840 | - Anyway, I might throw in my two cents as we go along.

00:13:06.040 | Go ahead and start from the beginning.

00:13:07.760 | - Yeah, so I mean like the beginning of financial advisors

00:13:10.400 | for most of us, like just, it was pure product sales.

00:13:13.880 | We sold insurance, we sold annuities, we sold stocks, right?

00:13:18.520 | Most of the roots of the industry

00:13:19.840 | are essentially like it's the stock broker.

00:13:21.160 | It's the Charlie Sheen, Wall Street, 1980s model,

00:13:25.640 | or Wolf of Wall Street model of stock brokering.

00:13:30.320 | And I mean, it paid well.

00:13:32.080 | If you go all the way back to even to the 1970s,

00:13:34.160 | like for big clients,

00:13:35.880 | we could get paid $200 a trade in 1975 dollars

00:13:40.680 | just to sell a stock to an individual client, right?

00:13:43.560 | That's like, I don't even know what the number is,

00:13:44.840 | probably a thousand plus dollars today,

00:13:47.200 | like as a ticket charge.

00:13:49.160 | - That was the fixed commission rate.

00:13:50.720 | - That was the fixed commission on a big trade.

00:13:52.760 | It was scaled to the size of the trade.

00:13:54.600 | That would be a big one, but-

00:13:56.000 | - Every firm had the same rate.

00:13:57.240 | - Every firm had the same rate by law

00:13:59.360 | because FINRA back then,

00:14:01.040 | the National Association of Securities Dealers,

00:14:02.920 | had fixed it at a set rate.

00:14:05.080 | It was like part of the aftermath of the Great Depression.

00:14:07.960 | There was a whole bunch of commission gouging

00:14:09.680 | in like the boom and the bust of the '20s and the '30s.

00:14:12.080 | Nobody paid attention to what they were paying

00:14:13.320 | when stocks were going to the moon in 1929.

00:14:15.120 | And then no one paid attention to what they were paying

00:14:16.640 | when stocks were going to the ground in 1931.

00:14:19.000 | So there was a bunch of commission gouging

00:14:20.800 | when people were just desperate to buy and sell.

00:14:23.120 | And the regulatory response back in the '30s was,

00:14:25.520 | well, we're just gonna set all the trading commissions

00:14:27.760 | at a fixed rate that every brokerage firm charges.

00:14:30.320 | Good news, got rid of all the gouging.

00:14:31.920 | Bad news, obliterated all the innovation

00:14:33.840 | 'cause no one reinvested

00:14:35.320 | into making brokerage more efficient

00:14:36.760 | 'cause you were legally barred from competing on price.

00:14:39.800 | So by the 1970s, we decide this regulatory structure

00:14:44.360 | has run its course.

00:14:45.240 | It's time to let it go.

00:14:46.440 | We deregulate the stock trading commissions.

00:14:49.040 | And a startup in Northern California,

00:14:52.880 | right outside of Silicon Valley says,

00:14:55.280 | hey, it's the 1970s.

00:14:56.480 | These things are coming out called computers.

00:14:59.280 | I think we could use computers

00:15:00.960 | to replace financial advisors.

00:15:02.560 | Like, why are we paying all these stock brokers

00:15:04.160 | so much money?

00:15:05.080 | A computer could do this.

00:15:06.440 | - Discount brokerage firm.

00:15:07.920 | - And a lot of people are familiar with the company

00:15:09.880 | 'cause the guy that said this was named Chuck Schwab.

00:15:12.320 | And Schwab was founded the month

00:15:13.760 | after the deregulation of trading commissions,

00:15:15.680 | basically to create, you know, call it robots of the era,

00:15:18.760 | to eliminate human financial advisors.

00:15:20.920 | As it turned out, like, it didn't kill advisors.

00:15:23.000 | We're still here.

00:15:24.280 | But it did obliterate stock trading commissions.

00:15:26.280 | Like, you know, we went from $200 a trade

00:15:28.320 | down to $20 a trade by the 1990s.

00:15:30.400 | Obviously, over the past 20 years,

00:15:31.760 | we took it from 20 all the way down to zero.

00:15:33.920 | So it did kill the stock brokering model

00:15:37.040 | and it forced us all to shift.

00:15:38.280 | And so as financial advisors,

00:15:39.920 | we shifted into a new environment.

00:15:41.320 | We said, well, you know, anybody can sell you a stock.

00:15:43.640 | I will find for you a great stock picker.

00:15:47.280 | Like, we went in the mutual fund business and said,

00:15:48.960 | well, I'll get you mutual funds with great managers.

00:15:51.320 | And, you know, huge growth cycle.

00:15:53.200 | The mutual fund industry alone in the 1990s

00:15:55.440 | grew from less than half a trillion dollars

00:15:57.160 | to five trillion dollars.

00:15:58.400 | Like, it was a 10X growth cycle.

00:16:00.120 | If you think the ETF shift has been big in the past 10 years,

00:16:03.120 | the mutual fund shift in the 1990s was actually bigger

00:16:05.840 | when you adjust for the market size at the time.

00:16:08.320 | All driven by technology was obliterating

00:16:10.960 | the financial advisor business model.

00:16:12.440 | And so we were all reinventing ourselves

00:16:14.080 | from stockbrokers peddling stocks

00:16:16.120 | into mutual fund salespeople.

00:16:17.480 | Still on the salesperson side.

00:16:18.880 | There was actually something else going on too.

00:16:20.960 | It was the wrap fee account.

00:16:22.440 | Yep.

00:16:23.280 | And this was started in the 1980s

00:16:25.920 | and really took off in the early 1990s.

00:16:28.760 | In fact, Shearson Lehman, which became Smith Barney,

00:16:33.840 | started a whole division that did this.

00:16:35.680 | CFAs, PhDs all get together and they're gonna go out

00:16:38.760 | and they're gonna pick the managers

00:16:40.720 | that are gonna outperform the institutional managers.

00:16:43.040 | And we are going to let you,

00:16:45.920 | who might have a couple of hundred thousand dollars,

00:16:48.000 | hire these very top-notch managers

00:16:51.040 | and charge you only 3% wrap fee.

00:16:54.120 | Very, very generous of them.

00:16:55.520 | And who cares?

00:16:56.360 | Like stocks were making 14% a year back then.

00:16:58.400 | It's like, who cares if the house gets a 3% vague?

00:17:01.000 | You're making only, you're making 11% net.

00:17:03.280 | It's still great.

00:17:04.280 | So phase two is this mutual fund or manage money,

00:17:08.720 | separate account management/mutual fund concept.

00:17:11.160 | And then what happened after that?

00:17:12.800 | The internet showed up.

00:17:14.360 | We like all this like discount brokerage

00:17:16.320 | becomes online brokerage.

00:17:18.080 | E-Trade runs all of their wonderful commercials.

00:17:20.040 | Like, you know, buying mutual funds is so easy.

00:17:21.680 | A baby can do it.

00:17:22.520 | Or, and they have the picture of the baby day trading stocks

00:17:24.920 | and mutual funds from the crib.

00:17:26.400 | All of a sudden, like you could buy mutual funds

00:17:28.560 | and sort of more practically like Schwab again,

00:17:30.840 | being one of the leaders in this space,

00:17:32.400 | launched their one source program

00:17:34.560 | where you could get almost any mutual fund

00:17:36.720 | in a giant supermarket with no commission.

00:17:39.640 | I mean, we would do them as no load funds,

00:17:41.680 | but the load is the commission that the advisor

00:17:44.840 | or mutual fund salesperson gets.

00:17:46.520 | And so a no load mutual fund marketplace

00:17:49.480 | essentially said,

00:17:50.560 | meant the internet brokerage companies

00:17:52.920 | were giving away a hundred percent

00:17:54.600 | what advisors did for no commission

00:17:57.560 | when our money came from commissions,

00:17:59.840 | which created kind of like the next crisis

00:18:02.120 | of business model for advisors

00:18:04.200 | and shifted us to where a lot of us are today,

00:18:06.200 | which was this huge shift

00:18:08.000 | into the assets under management model.

00:18:10.520 | So like you, anybody can pick a mutual fund

00:18:12.920 | on a brokerage platform.

00:18:14.080 | I will create for you a diversified asset,

00:18:16.440 | asset allocated portfolio of all of it brought together,

00:18:19.800 | aligned to your goals and your time horizon

00:18:21.960 | and consistent with your tolerance for risk.

00:18:23.920 | And for this aggregate service

00:18:25.600 | of everything brought together,

00:18:26.760 | I will charge you nearly 1% lower than the 3%

00:18:30.440 | that that she was gonna charge you for the wrap account.

00:18:33.800 | And so you see this sort of explosive growth

00:18:36.480 | over the past 20 years

00:18:38.200 | in the rise of assets under management.

00:18:42.320 | And once you're building assets under management,

00:18:44.680 | we tend to build them with ETFs to the point

00:18:46.760 | that now you see the entire mutual fund complex

00:18:49.520 | in net decline.

00:18:50.560 | That's kind of the tail end of,

00:18:52.360 | we started shifting away from the model

00:18:54.080 | in the late 1990s when the internet showed up,

00:18:56.920 | natural outcome is,

00:18:57.960 | well, now we're mostly in an AUM model

00:18:59.960 | charging these standalone 1% assets under management fees

00:19:04.080 | and the whole mutual fund sales complexes in net outflow.

00:19:07.340 | - I see the ETF evolution

00:19:10.360 | as giving the brokerage industry,

00:19:15.280 | traditional Merrill Lynch, UBS,

00:19:19.360 | Wells Fargo brokers,

00:19:20.720 | the ability to do this wrap fee.

00:19:23.680 | In other words, to compete with the independents who left.

00:19:27.000 | I left the brokerage industry in 1999

00:19:29.960 | to go and become one of these advisors.

00:19:32.560 | And the evolution of the ETF

00:19:37.120 | has allowed the wire houses,

00:19:40.360 | traditional wire houses to kind of backtrack

00:19:43.340 | and get into that business and compete head on head.

00:19:45.680 | - One, and some of it is just the,

00:19:47.240 | again, it's part of the evolution of that model itself.

00:19:51.600 | Just even from the advisor's end,

00:19:53.840 | as I'm sure more than a few listeners have observed as well,

00:19:57.120 | like at some point,

00:19:58.520 | I can just buy an asset allocated mutual fund on my own,

00:20:01.240 | or I can do this with a handful of Vanguard funds

00:20:03.640 | and pretty much get this done.

00:20:04.760 | It's like, why am I paying you, Mr. Advisor?

00:20:07.080 | So, one version of this goes down the road

00:20:10.680 | of sort of deeper financial planning advice,

00:20:12.360 | which we'll probably come back to in a few minutes.

00:20:15.540 | The other version of this is,

00:20:17.280 | well, I'm gonna manage your asset allocation

00:20:20.440 | more effectively, more proactively.

00:20:22.880 | And one of the big shifts to me that's happened

00:20:25.380 | just over the past 10 years

00:20:26.720 | is a lot of financial advisors

00:20:28.720 | have essentially become active managers of ETFs.

00:20:33.720 | And that that's become one of the big models in our space.

00:20:36.960 | So we used to buy the mutual funds

00:20:38.360 | and say the fund is the manager, I just pick them.

00:20:42.280 | Now we're often building with more passive vehicles,

00:20:45.280 | or like the ETF is sort of structurally

00:20:47.160 | a more passive vehicle,

00:20:48.560 | but a lot of advisors are actively managing the ETFs

00:20:52.720 | and not trying to necessarily justify

00:20:54.160 | if it's right or wrong.

00:20:55.260 | Frankly, some of them probably do it okay,

00:20:57.080 | and a bunch of them probably not so much

00:20:58.600 | 'cause we have a lot of other things we're doing as well.

00:21:01.920 | But relative to the mutual fund model,

00:21:05.080 | part of the big shift and focus

00:21:07.040 | has been the advisor come and say,

00:21:08.360 | look, you've got a bunch of mutual funds

00:21:10.980 | with an expense ratio of 2% because you own C shares,

00:21:14.480 | which essentially is 1% to the manager

00:21:16.640 | and 1% to the advisor who sold it to you,

00:21:18.680 | that's their trail commission.

00:21:20.400 | And the advisor comes in and says like,

00:21:21.760 | well, instead of just getting paid 1%

00:21:23.680 | for the mutual fund company for selling it to you

00:21:25.840 | on top of their 1%,

00:21:27.720 | I'll manage your portfolio for you for the same 1%.

00:21:31.380 | But if I'm gonna manage it for you,

00:21:32.460 | I don't need to give them their 1% on top of mine,

00:21:34.640 | I'm gonna buy it with a whole bunch of ETFs.

00:21:37.080 | And I'm gonna do this

00:21:37.920 | for 10 or 20 basis points of ETF costs.

00:21:41.440 | And so now my all-in cost as an advisor,

00:21:44.080 | it's 2% with your mutual fund portfolio,

00:21:46.200 | it's 1.2% with mine, my fee plus the ETFs.

00:21:50.160 | I can save you 40% off of your fees,

00:21:53.920 | not necessarily a cut to us as advisors.

00:21:56.400 | I mean, it's like that's the reality in the industry.

00:21:59.120 | I mean, that's why you're seeing so much of this shift

00:22:01.460 | within the advisor world towards ETFs

00:22:04.020 | is we're feeding on our own, right?

00:22:06.160 | The advisors that wanna build lower cost portfolios

00:22:10.920 | are killing the mutual funds themselves

00:22:14.400 | as a way to bring down costs for our clients.

00:22:17.720 | I mean, you can look at that a good or bad way.

00:22:20.520 | Obviously, the cynical version is just we come up

00:22:22.400 | with a way to defend our 1% and stick it to everybody else.

00:22:25.400 | But the good version of it is like,

00:22:26.760 | hey, at least we're proactively trying to earn our 1%

00:22:30.960 | by getting every upstream cost structure

00:22:34.220 | down as little as we can.

00:22:36.580 | And I do think just when you look structurally

00:22:38.940 | at the declining expense ratios

00:22:40.660 | across the industry right now,

00:22:41.980 | like it is that shift in the advisor business model

00:22:44.740 | that's driving a lot of it.

00:22:45.780 | When I sold mutual funds,

00:22:47.740 | I didn't get paid for finding a lower cost fund,

00:22:50.100 | I got paid for selling a fund that had a good story

00:22:53.340 | 'cause that's what sold.

00:22:55.060 | You know, all the way back to like the Munder NetNet

00:22:56.740 | was the big one when I was getting going.

00:22:58.920 | In this environment, at least for the advisors

00:23:01.020 | who are managing portfolios on an AUM basis,

00:23:03.500 | you know, our incentive as the advisor

00:23:05.340 | is to drive at least every other cost down that we can.

00:23:07.900 | We'll go through the pressure for ours,

00:23:09.620 | but at a minimum, we try to force every other cost

00:23:12.260 | out of the system.

00:23:13.080 | And because there are so many advisors in the aggregate,

00:23:15.500 | again, I think that's part of why you see such growth

00:23:18.380 | in ETFs and the whole mutual fund complex and net decline.

00:23:21.340 | Like we're causing it because the fee model puts you

00:23:25.780 | on the client side of the table.

00:23:27.140 | It's like when I represented the mutual fund company,

00:23:29.160 | I had no reason to bring down your costs.

00:23:30.840 | When I represent you,

00:23:31.880 | I have every reason to bring down your costs

00:23:34.120 | 'cause frankly, that's one of the ways I justify my fee

00:23:36.560 | as an AUM advisor.

00:23:38.280 | - So along comes Betterment, Wealthfront, Vanguard,

00:23:42.320 | and they're gonna do it.

00:23:43.540 | Same thing that you just talked about, you know,

00:23:45.280 | we're going to not only are we gonna drive down costs

00:23:47.880 | by having low cost funds in your portfolio,

00:23:50.760 | but we are gonna charge you a low fee.

00:23:54.540 | And this is another evolution that advisors appear

00:23:58.260 | to be grappling with right now,

00:24:00.640 | especially the 5,000 pound gorilla, which is Vanguard.

00:24:05.280 | - Vanguard itself, yes.

00:24:06.680 | - You know, at 30 basis point PAS program,

00:24:09.120 | all of a sudden showing the world that, yeah,

00:24:10.800 | you can have some advice plus portfolio management.

00:24:13.980 | And yeah, you don't need to pay 1%, you pay 0.3.

00:24:17.480 | And so is this a different phase now?

00:24:20.480 | Have we then moved to a different phase of advising

00:24:23.200 | that might include separation of asset management

00:24:26.060 | and advice and could you talk about that?

00:24:27.900 | - Yeah, we are very much in a kind of that

00:24:30.660 | fourth phase transition, right?

00:24:31.980 | So round one was stock brokering

00:24:34.060 | and then computers with discount brokerage killed it.

00:24:36.380 | Round two was the mutual funds

00:24:37.820 | and the online internet environment killed it.

00:24:40.860 | Round three was, you know,

00:24:42.260 | building diversified asset allocated portfolios

00:24:44.600 | and then kind of the rise of robos and the technology

00:24:48.040 | as well as just sort of the ability

00:24:49.420 | to work with people virtually is now disrupting that

00:24:53.400 | and driving kind of this fourth phase to it.

00:24:56.680 | The industry likes to talk about the proverbial 1%,

00:24:59.680 | but if you really actually look at most advisory firms

00:25:02.240 | and just take how much assets they have in total

00:25:05.020 | and how much revenue they bill,

00:25:07.080 | the average really is closer to about 70 to 80 basis points

00:25:10.060 | than it is 1%.

00:25:11.080 | Like there's some discounting

00:25:13.200 | and like all handle your kids accounts

00:25:14.840 | with charging them separately.

00:25:15.940 | And like, there's some money

00:25:16.800 | where you kind of wanna hold onto the stock

00:25:18.760 | 'cause you've had it a long time.

00:25:19.760 | It's like, I'm not really gonna manage,

00:25:20.760 | I'm gonna put it in a separate account

00:25:22.120 | and like we'll oversee it,

00:25:23.760 | but we're not actively trading it.

00:25:25.140 | So like the true net fee usually is a little bit lower

00:25:28.420 | than 1%.

00:25:30.220 | And so what I think you're starting to see emerge

00:25:33.980 | in this dynamic is that the advisor fee

00:25:36.380 | is essentially getting disaggregated

00:25:38.260 | into sort of three primary components.

00:25:41.380 | What's the raw cost to just build and manage

00:25:43.860 | a diversified asset allocated portfolio?

00:25:45.980 | And you know, it's not a terribly high number.

00:25:48.060 | It's not a zero number.

00:25:49.060 | Like just, there is some staff, there is some labor,

00:25:50.720 | there's some systems that have to get built,

00:25:52.120 | but you know, that's kind of converging

00:25:53.860 | in this 20 to 30 basis point ish.

00:25:56.060 | Yeah, 25 basis points, a good number.

00:25:59.080 | You know, the second component that you're seeing

00:26:00.800 | is all of, I'll just broadly call it

00:26:02.720 | the financial planning advice.

00:26:05.240 | And you know, that varies tremendously

00:26:07.200 | by firm and capability

00:26:08.420 | because we all use the title advisor,

00:26:10.640 | but we may not have as much training experience

00:26:12.920 | and knowledge in advising and actual advice,

00:26:15.120 | but that's everything from retirement planning,

00:26:17.400 | advising on insurance, advising on taxes,

00:26:19.660 | covering estate issues,

00:26:21.040 | just getting into cashflow and budgeting

00:26:23.160 | and where's your money going.

00:26:24.580 | Higher level questions about just,

00:26:26.120 | is your money actually going towards the things

00:26:27.840 | that fulfill you, you know, from a cashflow basis,

00:26:31.120 | from how your dollars are invested,

00:26:32.580 | from what you're trying to pursue.

00:26:34.040 | Like I don't get that from a robo.

00:26:35.840 | Like that's a human conversation

00:26:37.840 | and an exploration conversation.

00:26:40.360 | Let me jump in here and ask you though.

00:26:42.520 | I mean, that could be a conversation you have

00:26:44.740 | with somebody who has 300,000.

00:26:46.640 | It could be a conversation you have

00:26:47.960 | with somebody who has a million.

00:26:49.160 | It could be a conversation you have

00:26:50.800 | somebody with has 2 million,

00:26:52.960 | somebody who's going to inherit 10 million.

00:26:54.480 | I mean, it doesn't have anything to do really

00:26:57.320 | with the size of the portfolio.

00:26:59.440 | So how do you reconcile aligning a fee

00:27:04.440 | with this advice part of being an advisor?

00:27:08.640 | - So I'd answer that in, I guess, two primary ways.

00:27:13.600 | One, I mean, just to acknowledge,

00:27:15.080 | like there is a segment of industry

00:27:16.760 | that's starting to decouple that a little bit.

00:27:18.560 | That's doing things like, you know,

00:27:21.040 | I've got a financial planning fee.

00:27:23.480 | That's whatever my number is.

00:27:25.120 | Two grand a year, three grand a year,

00:27:26.360 | five grand a year or higher for some firms.

00:27:28.760 | And then I've got a separate fee

00:27:30.040 | for just managing your portfolio.

00:27:31.360 | And that's 50 basis points or some,

00:27:34.640 | at least much lower number relative to the proverbial 1%

00:27:38.400 | because like the planning stuff scales in a different way

00:27:41.740 | than the investment management stuff.

00:27:43.360 | And the fees are decoupling a little.

00:27:45.480 | So some of that is happening already.

00:27:48.260 | The other answer I would give to it though,

00:27:51.640 | just in practice.

00:27:53.340 | So there were two interesting things to me

00:27:55.320 | that does happen just as wealth lifts up.

00:27:59.840 | One is complexity does start to rise.

00:28:03.680 | It's not a perfect proxy.

00:28:05.020 | Like, you know, I have had clients with $5 million

00:28:08.080 | whose lives were simpler than people who had $200,000

00:28:11.300 | because of what's going on in their world.

00:28:14.020 | But it's actually a pretty decent correlation

00:28:16.940 | of the amount of complexity that's going on

00:28:19.180 | and the amount of wealth overall that we have.

00:28:20.860 | In part, just 'cause more wealth is more choices,

00:28:23.000 | more at risk.

00:28:23.840 | Frankly, like more predators coming after us,

00:28:25.580 | trying to sell us crappy things

00:28:26.780 | 'cause wearing my advisor hat.

00:28:28.120 | I spent a lot of time explaining to clients

00:28:29.700 | why the thing that's getting pitched to them is crappy

00:28:31.420 | and not actually good.

00:28:32.580 | And when you've got more wealth,

00:28:34.220 | a lot more things often can get pitched at you.

00:28:36.940 | Just the raw stakes of some strategies,

00:28:39.460 | not necessarily the retirement conversation,

00:28:41.580 | but you know, good tax planning strategies

00:28:44.180 | can just literally have more mathematical impact

00:28:46.700 | when there's more dollars at stake.

00:28:48.660 | So, you know, part of that,

00:28:50.480 | just part of that, like, you know,

00:28:52.580 | why does a $5 million clients get, you know,

00:28:55.220 | pay 10X to $500,000 client

00:28:57.140 | 'cause I'm charging a percentage of a portfolio

00:28:58.940 | that's 10X the size.

00:29:00.620 | Part of that is a proxy for complexity.

00:29:02.780 | Like, there is actually more stuff going on.

00:29:04.780 | If you look at most advisory firms,

00:29:06.580 | they do more, either they do more stuff

00:29:09.540 | for their more affluent clients,

00:29:11.220 | like there is more services rendered,

00:29:13.420 | or you are getting more senior expertise

00:29:16.440 | in the planning experience.

00:29:18.160 | You know, smaller, smaller, air quotes,

00:29:20.580 | smaller clients may work with slightly less knowledgeable

00:29:23.740 | and experienced advisors.

00:29:24.780 | Not to say they're inexperienced,

00:29:25.980 | but you know, it's kind of like the law firm thing.

00:29:28.600 | Like, you know, if I'm a small law firm client,

00:29:30.460 | I get the seven-year associate.

00:29:32.040 | If I'm a, you know, lot more at stake,

00:29:34.620 | I get the senior partner who has 37 years of experience

00:29:37.980 | and like has seen my situation more times

00:29:40.160 | than I've been alive.

00:29:41.000 | So there are kind of gradations that come in both.

00:29:46.000 | Advisors usually have graduated fee schedules.

00:29:49.420 | So frankly, like 10X the portfolio

00:29:51.620 | usually isn't 10X the fee.

00:29:52.820 | It may still be 5X or 7X,

00:29:55.180 | but like it's not perfectly linear.

00:29:57.940 | But more services, more experience,

00:30:00.100 | more dollars at stake,

00:30:01.620 | more consequences for the decision.

00:30:03.580 | You know, there does come a point

00:30:05.160 | where if you've got a lot of dollars

00:30:06.660 | and you're getting advice from someone,

00:30:07.940 | you want to make sure they have some,

00:30:09.500 | something at stake and some skin at the game

00:30:12.880 | for the consequences of their advice.

00:30:15.100 | And so, just for better or worse,

00:30:17.420 | like I think that's why you see the model hold up

00:30:20.380 | and continue to persist as strongly as it has.

00:30:23.840 | Now, that doesn't speak to a huge segment of people

00:30:26.540 | who like, I literally don't need anyone

00:30:29.840 | to manage my portfolio.

00:30:31.300 | Like I just want to pay for advice.

00:30:33.740 | And obviously like that whole

00:30:35.820 | assets under management model,

00:30:37.180 | like that just doesn't work.

00:30:38.940 | And so there's the growth of like advice only models

00:30:41.580 | and subscription models that are planning based

00:30:43.540 | in a whole lot of other really cool fee innovation

00:30:46.260 | that's happening there for the whole segment

00:30:48.700 | that's like, I just want to pay for advice.

00:30:50.340 | I don't need investment help.

00:30:52.580 | But for the folks that do

00:30:53.940 | where all of that gets bundled together,

00:30:55.740 | like, you know, wealth is not a perfect proxy

00:30:59.780 | for complexity in dollars that are at stake,

00:31:03.780 | but there is a piece of that.

00:31:05.340 | One final question.

00:31:06.740 | The advisor industry continues to evolve.

00:31:09.460 | The asset management industry continues to evolve.

00:31:12.040 | Fees continue to go down.

00:31:13.660 | Yes.

00:31:14.500 | People are trying to figure out the model.

00:31:16.100 | It doesn't seem like any of the old stuff's going away.

00:31:18.140 | I mean, there's still commission salespeople.

00:31:19.900 | There's still insurance people selling, you know,

00:31:21.780 | insurance, whole life insurance.

00:31:24.140 | Sometimes I just want to buy a product.

00:31:26.020 | Like, and I mean, sometimes I really do just want

00:31:27.740 | to buy a product and want someone to sell it to me.

00:31:30.500 | Like, there is a time, like, I go onto the car lot.

00:31:33.140 | Like, I just want someone to sell me the car.

00:31:34.780 | Like, I don't need a holistic automotive family consultant.

00:31:37.620 | Like, just sell me, like, I'm just here to buy a car.

00:31:40.500 | Like, sell me a car, tell me about the features

00:31:42.300 | and benefits, help me make a choice,

00:31:43.580 | and then take my order.

00:31:45.300 | So yeah, like, sales isn't going away.

00:31:48.220 | And then also AUM 1% advising

00:31:53.060 | where the advisor's trying to select ETFs that, you know,

00:31:56.340 | adding alpha with tactical asset allocation

00:32:00.540 | or smart beta or whatever, whatever you're doing,

00:32:03.620 | trying to add excess return.

00:32:05.220 | I mean, that's not going away.

00:32:07.180 | - No, it just, there will always be a segment of people

00:32:10.500 | who are willing to pay for the opportunity

00:32:12.420 | for outperformance.

00:32:13.380 | You know, lots of debate about whether they're going

00:32:15.420 | to find it.

00:32:16.260 | And you know, we've both read all of that research,

00:32:18.860 | but just, right, it's a human nature thing.

00:32:20.980 | There will always be a portion of us that are willing

00:32:22.780 | to pay for the opportunity to do better.

00:32:25.140 | - What I'm getting at here is that, you know,

00:32:27.460 | the old models have not disappeared.

00:32:29.660 | They've just overlaid a new model on top of it,

00:32:32.020 | and then a new model on top of that.

00:32:33.780 | And so we've talked about the latest new model.

00:32:37.140 | So my last question to you,

00:32:38.780 | because we have limited time here, is what's the future?

00:32:42.820 | You know, if you look forward, what's the good stuff

00:32:45.860 | that's happening in the advisor industry?

00:32:47.660 | And then, well, maybe you could start with,

00:32:49.620 | what's the bad stuff that you see happening and going on?

00:32:52.780 | And then what's the good stuff?

00:32:54.660 | - Here's the worst of the bad stuff to me right now.

00:32:57.380 | The worst of the bad stuff is that the whole industry

00:32:59.700 | has figured out, like, the future is advice.

00:33:02.020 | The future is just more holistic advice because I can,

00:33:06.260 | you know, get a diversified asset-allocated portfolio

00:33:08.380 | from a platform for 25 or 30 basis points.

00:33:11.300 | So like, we ain't winning on that.

00:33:14.260 | Gotta find somewhere else to add value.

00:33:15.820 | And so the whole industry has figured out

00:33:17.700 | the future is advice.

00:33:19.300 | And our regulators are very, very behind on this

00:33:22.140 | because there is open, just open, broad, unfettered usage

00:33:26.580 | of titles like financial advisor by people

00:33:29.380 | who are literally not in the advice business.

00:33:32.220 | Like, their legal job is to represent their company

00:33:36.380 | to sell a product.

00:33:37.900 | We see it in the insurance channels.

00:33:39.260 | We see it in the brokerage channels.

00:33:41.580 | This, like, ubiquitous adoption of financial advisor,

00:33:44.380 | financial consultant, and similar-sounding terms

00:33:46.860 | from people who are just literally, legally a salesperson.

00:33:50.380 | And usually it says somewhere on their business card,

00:33:52.300 | like, registered representative of such-and-such

00:33:54.340 | or licensed agent of such-and-such,

00:33:56.220 | which is a nice way of saying,

00:33:57.340 | I literally don't work for you.

00:33:59.260 | I work for that company in the--

00:34:01.180 | - Securities offered through blah, blah, blah.

00:34:03.460 | - Correct.

00:34:04.300 | The brokerage industry figured out the future is advice

00:34:07.060 | before the advice industry figured out

00:34:09.020 | how to protect their own space.

00:34:10.860 | And so the brokerage industry now is so encroached

00:34:13.300 | into the advice space with the titles, with the marketing.

00:34:16.460 | You go to most brokerage firms' website

00:34:18.020 | and they're talking about the holistic value

00:34:19.740 | of all the stuff they do

00:34:20.580 | to help your wealth management picture.

00:34:21.940 | And their literal legal purpose

00:34:24.100 | is to manufacture and distribute product.

00:34:27.300 | Like, they are not in the business of advice.

00:34:30.340 | That just confuses the bejesus

00:34:32.060 | out of the consumer landscape

00:34:33.420 | in ways that, frankly, the brokerage industry benefits from,

00:34:35.900 | which is why they continue to do it.

00:34:37.980 | - And what do you see as the bright spots?

00:34:39.980 | - To me, when I look at the bright spots, I see a few.

00:34:42.780 | Like, number one, the big one by far

00:34:45.100 | is we are in this transition from sales to advice.

00:34:48.580 | And relative to my roots, I know your roots as well,

00:34:51.980 | having sat on the sales side of the table,

00:34:54.340 | this shift of the industry from sales to advice,

00:34:56.740 | like what it means to me at the end of the day

00:34:58.660 | is I used to sit across from the client

00:35:00.700 | and try to sell them something.

00:35:01.780 | And now I sit on the client side of the table

00:35:04.380 | and we look out there at the landscape of what we can do

00:35:07.740 | that's best and beneficial for them.

00:35:10.220 | - So there's also a shift

00:35:11.260 | to different non-asset management fee models,

00:35:15.300 | where hourly or retainer.

00:35:18.660 | Do you see that growing as well?

00:35:21.260 | - The AUM model is basically just a tiny niche model.

00:35:24.220 | It works for a very, very small subsegment of consumers

00:35:27.460 | who have a material amount of assets,

00:35:29.900 | liquidity to actually hand it to an advisor,

00:35:31.900 | so it's not business or real estate

00:35:33.780 | or a 401(k) plan or something else,

00:35:36.000 | a willingness to delegate it to an advisor,

00:35:38.000 | so you don't wanna do the portfolio stuff yourself.

00:35:41.180 | By the time you take how many people have enough money

00:35:43.800 | to meet a typical advisor minimum

00:35:45.460 | or have it liquid and available

00:35:47.100 | and not tied up in a 401(k) plan,

00:35:49.020 | have a mental inclination

00:35:50.380 | towards delegating in the first place,

00:35:52.020 | you get down to something like 5% to 10% of all households.

00:35:55.180 | And that's it.

00:35:56.220 | The model does not fit literally 90% of the marketplace.

00:36:00.860 | And so as I look out,

00:36:02.660 | this shift is underway towards other fees.

00:36:05.420 | That's how the majority of consumers

00:36:07.980 | will need to engage advisors

00:36:10.220 | because you want a service,

00:36:12.420 | you pay from your available income.

00:36:13.880 | Like that's how we buy everything else.

00:36:15.400 | Assets in our management,

00:36:16.400 | it's just this really specialized niche model.

00:36:18.800 | It happens to work really well

00:36:19.960 | for a segment of affluent retirees

00:36:22.320 | that just wanna delegate so they can enjoy their retirement

00:36:24.760 | and hire a firm that has the expertise to handle it.

00:36:27.400 | But that's not most people.

00:36:29.440 | And so when I look out in the future,

00:36:31.920 | like I see the AUM model continuing to grow,

00:36:35.240 | but it will probably be a minority of advisors

00:36:37.720 | in the niche in 10 to 15 years.

00:36:39.980 | - Michael, it's been wonderful

00:36:41.480 | having you on Vogel Heads on Investing.

00:36:43.040 | Thank you for being on the show today.

00:36:44.880 | - Absolutely.

00:36:45.720 | My pleasure.

00:36:46.540 | Thank you.

00:36:47.380 | - Our second guest is Dr. Nicole Boysen

00:36:49.440 | from Northeastern University.

00:36:51.920 | I apologize for the quality of the sound on my end

00:36:56.920 | because I recorded it in a small room in a library

00:37:01.720 | while I was on vacation and the acoustics were not very good.

00:37:05.840 | So here we go.

00:37:07.200 | - So with no further ado,

00:37:08.420 | let me introduce Dr. Nicole Boysen.

00:37:11.960 | Welcome to the Vogel Heads on Investing podcast.

00:37:14.560 | - Thank you, Rick.

00:37:15.680 | Please feel free to call me Nikki.

00:37:17.380 | - Thank you, Nikki.

00:37:19.760 | I wanted you on the podcast

00:37:21.280 | because you are one of the rare academics out there

00:37:25.600 | who have studied the advisor industry as an academic.

00:37:30.600 | So you have no skin in this game.

00:37:33.480 | You don't work for an investment company.

00:37:35.840 | You don't work for a mutual fund company.

00:37:37.760 | You don't work for a brokerage firm.

00:37:38.940 | - That is absolutely true.

00:37:40.720 | - Before we get started on your research

00:37:42.800 | in the advisor industry,

00:37:44.600 | I wanted to hear your background.

00:37:46.400 | How did you get to this point where you are today

00:37:49.600 | as the department chair for finance at DMSE?

00:37:53.600 | - Yeah, so I think the kind of interesting part

00:37:55.920 | is I started out as a CPA.

00:37:57.600 | So my first job out of undergrad

00:38:00.280 | was in public accounting at KPMG, Pete Marwick,

00:38:02.720 | and I worked as an auditor, attained my CPA license.

00:38:07.760 | Did that for about three years

00:38:09.080 | and realized that being an auditor is a pretty good job,

00:38:12.040 | but it's also a little bit tedious.

00:38:13.920 | And so I went to work for one of my clients,

00:38:16.040 | was a commercial bank.

00:38:17.400 | And then I moved on to work for another person

00:38:21.200 | who does play a role here, who is an investment advisor.

00:38:24.160 | He was a fiduciary in some sense, but he also was a broker.

00:38:29.160 | And so I remember learning about that business.

00:38:31.480 | I was like 25 years old and thinking,

00:38:33.840 | this is a really interesting space, right?

00:38:35.880 | It probably took me about six months

00:38:37.480 | to understand the fees he was charging,

00:38:39.800 | how he was charging them.

00:38:41.120 | And I can say pretty clearly

00:38:42.480 | that I'm not certain his clients fully understood.

00:38:45.040 | So I kind of tucked that away, it's like 1996.

00:38:48.040 | Went on to leave that job,

00:38:50.320 | worked back in public accounting,

00:38:51.960 | and there I was in the investment advisory space

00:38:55.360 | at Ernst & Young.

00:38:56.880 | And so kind of little known fact,

00:38:59.040 | but the big accounting firms

00:39:00.240 | do have some investment advisory space.

00:39:02.720 | Some of them are registered

00:39:03.880 | and some of them are more giving advice

00:39:05.880 | as part of their tax client's business.

00:39:08.480 | And so I got to learn a little bit about RIAs

00:39:10.960 | and what that looked like.

00:39:12.760 | Ultimately turned 30, decided if I was going

00:39:15.200 | to go get a PhD, it was a good time to do it.

00:39:17.600 | So I went off, went to Ohio State, got a PhD,

00:39:21.200 | and started immersing myself in academic research.

00:39:24.120 | And so that was a lot of fun.

00:39:25.560 | - Okay, so you've been in academics then

00:39:28.920 | for more than 15 years.

00:39:30.560 | - Yeah, more than 20 years.

00:39:31.680 | I started my PhD in 1998 and graduated,

00:39:35.720 | call it 2002, 2003.

00:39:38.240 | Went to work for Purdue for a little while,

00:39:40.240 | just over a year, and then got my current position

00:39:43.040 | at Northeastern in 2004.

00:39:45.120 | And so I've been able to kind of move up the academic ranks,

00:39:48.360 | which has been really wonderful.

00:39:50.160 | Started as an assistant professor,

00:39:52.400 | get promoted with tenure,

00:39:53.680 | and then was promoted again to be a full professor.

00:39:56.600 | Recently took on the department chair role,

00:39:58.800 | which is, as academics know, it comes with pros and cons.

00:40:03.680 | Also co-editing the Financial Analyst Journal,

00:40:06.160 | which I'm really proud of and excited about.

00:40:08.800 | And then, yeah, my research has evolved.

00:40:10.840 | I started out being very interested in hedge funds.

00:40:14.000 | I started my program in 1998.

00:40:15.960 | And for those of you who know about hedge funds,

00:40:18.160 | that's when long-term capital management blew up.

00:40:20.400 | And it was just a really interesting time to study that.

00:40:23.760 | And I was also very fortunate to be kind of young

00:40:26.640 | in that area.

00:40:27.480 | I mean, I was young, but the area was young as well.

00:40:29.760 | And so I was able to do a lot of really cool work

00:40:33.280 | with new datasets and try to understand

00:40:36.480 | risk and return characteristics.

00:40:38.360 | Moved on to start focusing on hedge fund activism,

00:40:41.560 | which I would say is probably my key body of work.

00:40:44.040 | I worked on that for eight or 10 years.

00:40:46.080 | And then the last few years, decided to just go back,

00:40:50.080 | think about that investment advisory job

00:40:52.320 | that I had back in 1996.

00:40:55.320 | And I started that project,

00:40:57.160 | which we'll talk about in detail,

00:40:58.960 | but I started thinking about that project.

00:41:01.080 | I'm interested broadly in investing

00:41:04.000 | and institutional investors in particular.

00:41:06.400 | And I started looking at mutual fund flows

00:41:09.120 | for whatever reason.

00:41:09.960 | I was just reading the ICI report,

00:41:13.560 | 'cause that's what academics do.

00:41:15.200 | And I was reading this report and I noticed

00:41:17.720 | that funds were money, money was flowing

00:41:20.560 | into institutional share classes of mutual funds,

00:41:23.480 | which are presumably cheaper and often in my mind,

00:41:27.520 | what I thought were going to institutional investors

00:41:30.760 | and moving out of the broker sold side.

00:41:33.360 | And having worked for a broker way back when,

00:41:35.640 | I thought this is probably good for clients

00:41:38.080 | because if brokers are no longer able,

00:41:41.000 | and again, brokers are not evil,

00:41:42.480 | but the broker I worked for was pretty opaque

00:41:44.880 | about the fees he charged.

00:41:46.320 | And so institutional funds are cheaper and often sold.

00:41:50.600 | Turns out I learned this

00:41:51.720 | by registered investment advisors.

00:41:53.440 | So I thought this would be good, right?

00:41:55.720 | RIAs are fiduciaries,

00:41:57.280 | they have their client's best interest at heart,

00:41:59.160 | and they're selling these share classes that are cheaper

00:42:01.520 | and presumably more transparent

00:42:03.800 | in the way that they charge fees.

00:42:05.040 | So my initial premise was, this is a very positive thing,

00:42:08.480 | but let's look into it a little deeper.

00:42:10.440 | - So it was the mutual fund flows

00:42:12.800 | from the Investment Company Institute Annual Report, ICI,

00:42:15.880 | as you stated, that got you, I wonder why that is.

00:42:19.400 | I wonder what's going on here.

00:42:21.080 | This is interesting.

00:42:22.480 | Well, you must also then be interested

00:42:23.960 | in the amount of money flowing into ETFs

00:42:25.720 | and the amount of money flowing

00:42:26.640 | into index funds in general.

00:42:28.120 | - Absolutely.

00:42:28.960 | So there's sort of two things that are going on.

00:42:31.320 | I mean, the one was that within a particular fund,

00:42:34.880 | let's pick an active fund, say the MFS Growth Fund,

00:42:37.760 | we would see more money flowing

00:42:39.120 | into the institutional share class of that active fund

00:42:42.280 | than the broker sold class.

00:42:43.480 | And so I thought, okay,

00:42:44.880 | I'm gonna write a paper about distribution.

00:42:46.760 | And you know, I kind of did.

00:42:47.800 | So who's distributing these share classes?

00:42:49.920 | It's not brokers anymore, right?

00:42:51.320 | That was my first thought.

00:42:52.720 | The other piece that you mentioned,

00:42:54.240 | which does come up in my paper,

00:42:56.000 | but is a little more tangential is,

00:42:58.480 | what about the composition of the investment?

00:43:00.440 | So is money flowing out of active into passive?

00:43:04.080 | I knew that was happening being an academic

00:43:06.320 | and studying this for years,

00:43:08.160 | but also trying to think about then

00:43:10.400 | the distribution side of passive versus active.

00:43:13.320 | And my paper focuses only on active

00:43:15.880 | because my premise, which I know is true,

00:43:18.320 | is that most of the folks on the brokerage side

00:43:21.400 | are not selling passive funds

00:43:23.760 | because it's kind of hard to justify your big commissions

00:43:26.840 | if you're just selling an index fund.

00:43:28.520 | RIA sell passive funds,

00:43:30.320 | but my point was trying to think about the movement

00:43:33.720 | out of brokerage into institutional

00:43:35.800 | within kind of the active space.

00:43:38.720 | - Prior to this, I interviewed Michael Kitsis

00:43:41.040 | and I've known Michael for many years,

00:43:43.040 | and we've both seen the evolution of the advisor industry.

00:43:47.600 | I've been in the business now 35 years

00:43:49.280 | and started out as a broker,

00:43:51.240 | and then went out, became an RIA on my own

00:43:54.280 | and used index funds mostly from Vanguard

00:43:57.160 | and a couple of other companies.

00:43:58.400 | And now I'm just doing advice only.

00:44:00.200 | So I've lived through this evolution.

00:44:03.000 | So one thing we didn't talk about was the number of people

00:44:06.280 | that are kind of locked into each one of these groups.

00:44:09.680 | And I was reading the latest FINRA industry snapshot,

00:44:16.160 | which you referenced in your paper,

00:44:18.640 | and found out that there are probably

00:44:22.120 | close to 700,000 people

00:44:25.600 | who are calling themselves advisors based on FINRA.

00:44:30.600 | Now that gets broken down into registered reps

00:44:35.600 | who work for brokerage firms,

00:44:38.440 | or in your paper, duly registered.

00:44:42.240 | And there was about 720,000 of them.

00:44:46.080 | And they could be working for big firms

00:44:49.320 | like UBS, Wells Fargo, Merrill Lynch.

00:44:51.880 | There's also RIAs, registered investment advisors.

00:44:55.880 | And this is a considerably smaller number, about 70,000.

00:44:59.680 | So basically about 10% of the advisor community

00:45:04.360 | are registered investment advisors.

00:45:05.840 | And these people who are paid a couple of different ways,

00:45:08.960 | but the main way is through assets under management.

00:45:12.720 | And they're managing money, they're managing portfolios,

00:45:15.080 | and they're charging a fee based on those assets.

00:45:17.920 | And so it's assets under management.

00:45:19.720 | There's also people who are doing retainers

00:45:22.840 | and fixed fee and hourly and so forth.

00:45:25.360 | But that's a very, very small number,

00:45:27.320 | a very small number, maybe less than 1,000 even.

00:45:31.040 | And then there are the people that you studied.

00:45:35.320 | And these are dual registered advisors.

00:45:37.800 | And what they are, are both brokers and RIAs.

00:45:42.800 | And here is where it becomes interesting.

00:45:47.080 | And here is where you wrote about in your paper,

00:45:49.720 | which I wanna get into in detail.

00:45:52.080 | And that is that you're able to analyze

00:45:55.240 | what they were selling as brokers

00:45:58.800 | and what they were selling or using as fiduciary RIAs.

00:46:06.320 | And you found some real conflicts of interest.

00:46:08.440 | So could you get into the paper a little bit?

00:46:11.240 | Absolutely.

00:46:12.280 | And I think you framed the industry really clearly.

00:46:15.920 | And when I think about the industry,

00:46:18.160 | I think about it that way as well.

00:46:19.560 | And so as I was kind of following up on this,

00:46:22.840 | money's flowing into institutional funds

00:46:25.520 | and out of broker sold funds,

00:46:27.800 | I didn't realize at first that it was actually the same guy.

00:46:31.320 | And I'm gonna say guy, 'cause it's mostly men,

00:46:33.440 | but it was actually the same guy

00:46:35.040 | who was selling both those share classes

00:46:37.160 | to different clients under the same umbrella of his firm.

00:46:41.000 | And this is a dual registered advisor

00:46:43.000 | who could sell the broker commission side of the mutual fund

00:46:46.400 | and collect an asset management fee

00:46:49.160 | by using the other side as well.

00:46:51.320 | Exactly, exactly.

00:46:52.840 | And again, so if you think about kind of the evolution

00:46:55.960 | would be, you know, say in the year,

00:46:58.600 | let's just go back to say the year 2000,

00:47:00.600 | just to give it a clear number,

00:47:02.400 | someone starts, some guy starts working

00:47:04.200 | for say a company called Ameriprise.

00:47:06.200 | And at that time Ameriprise

00:47:07.880 | and all the big dual registered firms,

00:47:10.280 | and to be clear what I mean by dual registered firms

00:47:13.160 | is that, as you said, they have both a brokerage arm,

00:47:16.200 | which is really their legacy business.

00:47:18.280 | And then they've got a registered investment advisory arm,

00:47:21.280 | which is, I would call slightly newer.

00:47:23.280 | Now, many of these firms have been dual registered

00:47:25.840 | for a very long time,

00:47:27.120 | but the brokerage side of their business was dominant.

00:47:29.640 | So if you go back to like the year 2000, 2004,

00:47:33.280 | you'll find about 80% of the revenues

00:47:35.360 | coming from the brokerage side of a business,

00:47:37.640 | let's just pick on Ameriprise,

00:47:39.200 | and 20% coming from the RIA side.

00:47:41.760 | And over time for various regulatory reasons

00:47:45.000 | that we can talk about or not, the balance shifted.

00:47:48.360 | And so now what you'd find at Ameriprise

00:47:50.680 | is probably most new clients walking in the door

00:47:53.520 | are being put into RIA accounts,

00:47:55.720 | fewer in brokerage accounts.

00:47:57.640 | And part of the reason is one,

00:48:00.040 | the RIA accounts are going to be charging

00:48:02.480 | one or 2% per year to the small clients,

00:48:05.880 | which turns out over the longterm

00:48:07.800 | to be more lucrative for the advisors.

00:48:10.040 | And the other reason is that investors probably are,

00:48:14.080 | brokers have gotten a bad name in many cases.

00:48:16.560 | So if I'm at Ameriprise, I can say,

00:48:18.560 | "Hey, look, I'm a fiduciary.

00:48:20.400 | I'm gonna put you in a fiduciary account,

00:48:22.360 | and I'm gonna charge you an annual fee,

00:48:24.160 | you know, one or 2%, whatever that is."

00:48:26.200 | And so the dual registered advisors,

00:48:28.720 | it's at the firm level, right?

00:48:30.560 | The firm has both abilities,

00:48:32.400 | but it's also at the advisor level.

00:48:34.280 | So they've got both, right?

00:48:35.760 | It's just a matter of taking another test.

00:48:37.640 | And so then when a client comes in,

00:48:39.000 | they can decide, you know, presumably with the client,

00:48:41.520 | do you wanna be a brokerage client?

00:48:42.760 | I'll sell you some load funds,

00:48:44.120 | or do you wanna be an RIA client?

00:48:45.680 | Where I do have more responsibility for you,

00:48:48.520 | but I'm gonna charge you an asset-based fee.

00:48:50.720 | - And by the way, let me get back to the numbers.

00:48:55.040 | It turns out that about half of the brokers

00:48:59.920 | are dual registered.

00:49:01.160 | So over 300,000, in fact, it's been increasing.

00:49:05.720 | The interesting point about your paper,

00:49:07.760 | which I found fascinating,

00:49:09.040 | was that you have this unique lens then

00:49:12.120 | to analyze investment decisions by these advisors.

00:49:17.120 | And are they doing what's in the best interest

00:49:21.240 | of their clients,

00:49:22.080 | given the fact that they could go the commission route,

00:49:24.240 | or they could go the RIA route and charge AUM fees?

00:49:29.240 | The question became, are they actually doing

00:49:32.680 | what's in the best interest of their clients?

00:49:34.520 | So I turn it over to you.

00:49:36.800 | Are they?

00:49:37.640 | - So the overarching conclusion of my paper is,

00:49:41.200 | no, they are not.

00:49:42.360 | So I wanna be a little bit clear.

00:49:45.760 | It's not obvious to me that they are acting

00:49:47.840 | in the best interest of their clients.

00:49:49.320 | And I'll just list a few reasons why.

00:49:51.640 | One really important reason why

00:49:53.840 | is that during my sample period,

00:49:56.680 | these dual registered advisors

00:49:58.720 | within the RIA side of their business

00:50:01.480 | were also charging commissions.

00:50:03.880 | Now, these commissions were small.

00:50:05.760 | They came in the form of trail commissions

00:50:08.200 | from mutual funds, which for those of the audience here

00:50:11.120 | who's not experts on mutual fund structure,

00:50:13.840 | this is a typically 25 basis points,

00:50:16.680 | so one quarter of 1% fee that the mutual fund family

00:50:20.800 | is paying to the advisor.

00:50:23.720 | - Oh, is that right?

00:50:24.760 | I didn't know they could do that.

00:50:26.280 | I thought if you were an RIA

00:50:27.720 | and you were charging an asset management fee,

00:50:29.800 | you couldn't get trailing commissions as well,

00:50:32.600 | but you're saying you can?

00:50:33.720 | - I thought that for a long time

00:50:35.080 | and I had a whole bunch of people tell me you couldn't,

00:50:36.840 | but then I read everything I could find

00:50:39.600 | and the answer is you sure can.

00:50:41.240 | And in fact, the SEC tried to crack down on this in 2019,

00:50:45.440 | which I'll talk about in a sec.

00:50:47.040 | But effectively what was happening then is,

00:50:49.840 | imagine I'm at Ameriprise and I've got a client come in,

00:50:53.280 | I'm going to put that client

00:50:54.360 | in an institutional share class of a mutual fund.

00:50:57.080 | But many of those institutional share classes

00:50:59.800 | are also paying this 25 basis point trail commission.

00:51:04.160 | And it was not at all clear, nor was it happening,

00:51:07.400 | that the Ameriprise advisor would say,

00:51:09.800 | "Okay, I was gonna charge you 1%,

00:51:12.480 | "but because I get this trail,

00:51:14.160 | "I'm gonna charge you 75 basis points

00:51:16.240 | "so that your total fee is 1%."

00:51:18.400 | Absolutely not.

00:51:19.800 | - So let me ask you about that.

00:51:22.280 | Is that a rule or a law?

00:51:24.760 | In other words, are they supposed to do that?

00:51:27.080 | In other words, if they normally charge 1%,

00:51:29.840 | yet they're getting comped from the mutual funds

00:51:32.360 | that they're putting money into, let's say 0.25,

00:51:36.040 | are they required by law to bring it down to 0.75?

00:51:39.000 | - Nope, and they still aren't.

00:51:40.760 | Reg BI didn't change that.

00:51:42.400 | They're not required by law.

00:51:43.480 | What they're required to do

00:51:44.480 | is tell their clients they're doing it.

00:51:46.200 | And so this was where the trouble came in.

00:51:48.480 | Around 2019, the SEC knew this was going on

00:51:52.600 | with all the big dual registrants.

00:51:54.360 | And they said, "Hey, look, dual registrants.

00:51:56.640 | "We know you're doing this, and we know it's legal,

00:52:00.280 | "but the problem is you're not properly disclosing it

00:52:03.520 | "to your clients."

00:52:04.640 | In other words, what their form ADV would say is,

00:52:08.360 | "We may choose mutual funds that pay us a trail commission

00:52:12.680 | "in addition to your fees."

00:52:15.120 | But what they really should have written down was,

00:52:17.280 | "We always do this," or, "We're going to do this,"

00:52:19.760 | or, "Most of the time we do this."

00:52:21.440 | And so the problem, interestingly,

00:52:23.720 | as I found throughout the paper over and over,

00:52:26.480 | isn't so much that they were doing illegal stuff,

00:52:28.960 | although they frequently were.

00:52:30.280 | There are tons of disciplinary actions,

00:52:32.680 | but even the stuff they were doing that was legal,

00:52:35.200 | and which I would call sort of at least potentially unethical

00:52:38.320 | and certainly conflicted,

00:52:39.840 | they weren't disclosing it properly.

00:52:41.520 | So what the SEC did was they had this thing

00:52:43.600 | called the Share Class Disclosure Initiative,

00:52:45.960 | and they said, "Hey, all you guys who are doing this,

00:52:48.600 | "you need to come clean.

00:52:49.900 | "You need to tell us, the SEC, how much you were doing this,

00:52:54.360 | "and you need to reimburse clients because,

00:52:56.880 | "not because you were overcharging them,

00:52:58.580 | "but because you didn't tell them

00:52:59.680 | "you were overcharging them."

00:53:01.600 | - How many firms are we talking about?

00:53:03.160 | In your paper, you mentioned Raymond James.

00:53:05.680 | Can I name off a few more, like LPL?

00:53:09.040 | - Oh, of course.

00:53:10.160 | Yeah, there are hundreds of dual registrants.

00:53:12.440 | The top 10, which you'll see in my paper,

00:53:15.360 | manage something like 75, 80% of the assets.

00:53:18.440 | - Okay, and they found this across the board

00:53:20.220 | in all these dual registrants?

00:53:22.080 | - 100 dual-registered firms ended up kind of being involved

00:53:26.920 | with this disclosure initiative.

00:53:28.640 | And the number is still kind of happening,

00:53:31.520 | but I believe the initial was something like 97 came forward

00:53:35.720 | and then three of them, the SEC,

00:53:37.200 | had to go after on their own.

00:53:38.800 | And effectively, the deal that the SEC cut was,

00:53:42.160 | we won't charge you any civil penalties.

00:53:44.120 | What we'll make you do is pay these folks back

00:53:47.120 | and going forward, improve your disclosures.

00:53:50.600 | - Well, it wasn't illegal.

00:53:51.800 | It's still not illegal.

00:53:52.640 | They're still doing it.

00:53:53.460 | They just have to disclose it somewhere

00:53:55.120 | that they're doing this.

00:53:56.000 | - What I will say is fascinating about that

00:53:58.160 | is my look at some form ABVs post this incident.

00:54:02.820 | So this got all kind of wrapped up by 2020.

00:54:06.560 | Most of the firms now are not doing it, right?

00:54:09.940 | So now if you read the form ABVs,

00:54:12.120 | they realize that the next step for the SEC

00:54:14.960 | probably would be to make something like this illegal

00:54:17.280 | or at least much more hard to do.

00:54:20.000 | And so what most of them are doing is they are,

00:54:22.880 | they say clearly in their form ABV,

00:54:25.320 | we're not gonna do this if we can help it.

00:54:27.520 | If we really like the fund

00:54:28.680 | and it has a 25 basis point trailer,

00:54:30.800 | these are called 12B1 fees also, we will rebate it.

00:54:34.560 | And so I will say that this has been

00:54:36.320 | the most encouraging thing that's come out

00:54:38.000 | of this initiative, has nothing to do with my paper.

00:54:40.580 | But what I did see happening

00:54:42.580 | was when the SEC cracked down on this,

00:54:44.660 | but effectively it did seem to help.

00:54:46.540 | And so they seem to be doing it less.

00:54:49.220 | I'm sure it's still happening.

00:54:50.540 | The handful that I looked at that kind of got busted

00:54:52.860 | seem to have kind of like

00:54:54.380 | gone the straight and narrow on that.

00:54:56.300 | - Well, let me ask you about the larger firms,

00:54:57.860 | the wire houses, like the Merrill Lynch's,

00:55:00.800 | Wells Fargo and all that,

00:55:02.580 | they weren't involved in this, were they?

00:55:04.060 | - They were, absolutely, all the big firms.

00:55:06.420 | - Interesting.

00:55:09.060 | I want to go back, I want to circle back

00:55:10.740 | to the conflicts of interest.

00:55:12.420 | And I just hit maybe three or four points

00:55:16.060 | on conflicts of interest.

00:55:17.220 | - So the very obvious conflict there

00:55:19.300 | is that you would choose products

00:55:21.100 | that paid the highest possible commission.

00:55:23.220 | So you would look at the menu

00:55:24.660 | of all the mutual funds out there

00:55:26.400 | and pick the one that paid the highest possible commission

00:55:28.860 | without regard to whether that product

00:55:32.060 | was good for your client.

00:55:33.380 | And so I think that conflict is very obvious.

00:55:36.060 | You might choose a variable annuity, which again,

00:55:38.260 | some variable annuities are fine, they have lower fees,

00:55:40.260 | but like the historical model of variable annuities

00:55:43.060 | is that they paid the biggest commissions.

00:55:45.380 | And if you were a broker,

00:55:46.900 | that was where you got your biggest bang for your buck.

00:55:49.280 | - And a second one?

00:55:50.120 | - One conflict that was really common

00:55:52.540 | in the brokerage space,

00:55:53.460 | they would use the term churning,

00:55:54.900 | meaning that they put you in a product

00:55:57.920 | and then three years later,

00:55:59.400 | sell you out of that product,

00:56:00.580 | put you in a new product

00:56:01.580 | that had another big front load commission, right?

00:56:04.020 | And so without getting in the weeds on mutual funds,

00:56:06.420 | effectively, if you just think of,

00:56:08.020 | I get paid a commission every time I trade,

00:56:10.540 | and this would be true with trading stocks as well,

00:56:12.540 | which paid really hefty commissions back in the '80s,

00:56:15.140 | I'm gonna trade as much as possible.

00:56:16.980 | And certainly that's rarely good for any client,

00:56:19.780 | even just from a pure tax perspective,

00:56:21.660 | it's probably not a good idea.

00:56:23.180 | And then the other thing that you and I had chatted about

00:56:25.980 | in the past was this idea about certain fund families

00:56:29.420 | would say, if you have a certain number of dollars with us,

00:56:32.540 | the commissions are lower.

00:56:34.000 | So a client with a million dollars

00:56:35.640 | would pay a very low commission.

00:56:37.220 | So what the broker would do is say,

00:56:39.420 | well, we're not gonna just use one fund family,

00:56:41.580 | let's divide you up into six fund families

00:56:43.660 | so that they could maximize their commission

00:56:45.900 | across the total that was being invested.

00:56:48.200 | - I have seen a few, not many,

00:56:52.340 | and I review accounts basically daily.

00:56:55.220 | I have seen a few broker, brokers, just broker only,

00:57:00.220 | not doing AUM,

00:57:01.340 | who have actually done the right thing for clients.

00:57:03.400 | They will put a million dollars in one fund company

00:57:06.600 | to get the break points.

00:57:07.820 | I'll look at the account statement and I'll see this,

00:57:10.580 | and I'll say, wow, I rarely see that.

00:57:12.900 | I really, basically most of the time,

00:57:14.360 | I see this thing broken up

00:57:15.380 | so that the broker gets higher commissions

00:57:17.460 | by breaking it up into different fund companies,

00:57:19.180 | but I actually have seen on a few occasions in my career

00:57:23.020 | where a broker has actually done the right thing.

00:57:26.220 | So it's just because you are a broker

00:57:28.060 | doesn't mean that you're doing this.

00:57:29.980 | I'd say that a lot of brokers are,

00:57:32.300 | but there are some that are really acting much more

00:57:35.100 | like a fiduciary than the AUM advisors who,

00:57:38.980 | even though they are fiduciaries,

00:57:40.400 | I have to say that I have seen a lot of people

00:57:43.080 | not acting in the client's best interest,

00:57:44.760 | even though they're charging AUM.

00:57:45.600 | - Yeah, so my paper really is kind of silent

00:57:49.180 | on the AUM versus commissions.

00:57:53.200 | When I compare to the RIA,

00:57:54.760 | so I have dual registrants,

00:57:56.440 | then I have independent RIAs that aren't affiliated.

00:57:59.280 | I can compare their fees,

00:58:00.760 | and the only thing I can tell you

00:58:02.000 | is that the dual registrants charge higher percentage fees

00:58:05.560 | to their retail clients,

00:58:06.980 | but then a lot of the independent RIAs

00:58:09.180 | don't take small clients.

00:58:10.460 | So oftentimes stuck between a rock and a hard place.

00:58:13.820 | - What about fees for advice not linked to commissions

00:58:17.780 | and not linked to assets under management?

00:58:19.780 | - I think that when you decouple the products

00:58:22.340 | from the advice,

00:58:23.780 | that clearly is going to reduce conflicts

00:58:26.240 | because for obvious reasons, right?

00:58:28.820 | If you're not getting paid based on assets

00:58:31.560 | or if you're not getting paid a commission

00:58:33.380 | based on a particular product,

00:58:35.040 | your independence is going to be more of a straight line

00:58:38.420 | and fewer conflicts.

00:58:39.740 | The conflicts, I guess, that could occur there

00:58:41.740 | would just be you talk to them for an hour

00:58:44.540 | and charge them for two,

00:58:45.380 | but that's more fraud than it is a conflict, right?

00:58:48.480 | - Well, Nikki, thank you so much for joining us today

00:58:51.300 | and appreciate all of the work.

00:58:53.460 | I know it's very difficult digging up this information

00:58:56.260 | when the industry really doesn't want you to have it.

00:58:58.660 | We greatly appreciate your insight

00:59:00.300 | and thank you again for joining us.

00:59:02.160 | - Yeah, thank you so much.

00:59:03.200 | It was a great time and I'll keep you posted on my findings

00:59:06.160 | as I get through that work.

00:59:07.920 | - This concludes this edition of Bogleheads on Investing.

00:59:10.840 | Join us each month as we interview a new guest.

00:59:13.760 | In the meantime, visit boglcenter.net, bogleheads.org,

00:59:18.000 | the Bogleheads Wiki, Bogleheads Twitter.

00:59:20.480 | Listen live each week to Bogleheads Live on Twitter Spaces,

00:59:23.960 | the Bogleheads YouTube channel, Bogleheads Facebook,

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00:59:28.400 | Join one of your local Bogleheads chapters

00:59:31.280 | and get others to join.

00:59:32.640 | Thanks for listening.

00:59:33.840 | (upbeat music)

00:59:36.420 | (upbeat music)

00:59:39.000 | (upbeat music)

00:59:41.580 | you

Bogleheads® on Investing Podcast 047: Michael Kitces, Nicole Boyson -The Investment Adviser Industry

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