Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: So this week on the podcast, I have a really
Speaker 1: fascinating guest. And I know I said that every week,
Speaker 1: but this is really deep inside baseball. Uh, how how
Speaker 1: the industry works, how it's supposed to work, what it
Speaker 1: doesn't do. Ron Rhodes is a professor, lawyer, uh fiduciary.
Speaker 1: He has been both in and around the industry and
Speaker 1: a number of capacities, both as a lawyer setting up
Speaker 1: trusts in the States and other such stuff, running an
Speaker 1: r i A, running a fiduciary shop, and as a
Speaker 1: professor teaching financial planning and other things. He's probably best
Speaker 1: known as a gadfly who has been lobbying Congress, the SEC, FINRA,
Speaker 1: the Department of Labor. I call him a one man
Speaker 1: wrecking crew. He, amongst other people, prevented FINRA from becoming
Speaker 1: the uh S r O for the r A industry.
Speaker 1: He has been absolutely crucial in moving the ball down
Speaker 1: the field for moving towards a fiduciary standard for all
Speaker 1: advisors or many advisors. This is if you're interested in
Speaker 1: managing money, running a firm, or understanding the regulatory process
Speaker 1: and how it impacts investors and brokers and advisors. Uh,
Speaker 1: this is really a very deep dive into that sort
Speaker 1: of stuff. Stay with it. It gets more and more
Speaker 1: detailed and interesting as we go on, and the podcast portion,
Speaker 1: as you'll hear, is really terrific. So, without any further ado,
Speaker 1: my conversation with Professor Ron Rhodes. This is Masters in
Speaker 1: Business with Barry Ridholts on Bloomberg Radio. My special guest
Speaker 1: this week is Ron Rhodes. He is a professor at
Speaker 1: Western kentuck A University where he is chairman of the
Speaker 1: Financial Planning Program and teaches applied investments, retirement planning, and
Speaker 1: estate planning. You may not have heard of Ron if
Speaker 1: you're not in the asset management business or if you
Speaker 1: don't work for the SEC. But a little bit of
Speaker 1: background as to who he is. He was voted Wealth
Speaker 1: Management Magazines uh most influential person today. That was back
Speaker 1: in He is the recipient of the Tamar Frankel Fiduciary
Speaker 1: of the Year award, and he was named by Investment
Speaker 1: Advisor magazine one of the twenty five most influential persons
Speaker 1: in the asset management business. Ron, Welcome to Bloomberg Great
Speaker 1: thanks good to be here. So so that was a
Speaker 1: little bit of an ambiguous introduction. I want to ask
Speaker 1: you a question. For someone like me, you do many
Speaker 1: different things, You wear many different hats. But when people
Speaker 1: first meet you and in the conversation they ask what
Speaker 1: do you do? How do you answer that question? Well,
Speaker 1: you know, I asked people to think back to to
Speaker 1: their kids and as they were growing up. Um, kids
Speaker 1: need to be pushed, uh to develop and and that's
Speaker 1: why God invented mothers. But but those kids are sent
Speaker 1: off to college by their mothers. And that's why God
Speaker 1: invented college professors like myself. So your job is to
Speaker 1: push them in the right direction, push them expand their
Speaker 1: comfort zones, to show them how to develop and maintain
Speaker 1: relationships other than the relationship they have with their smartphone
Speaker 1: or their Facebook page, and uh, to get them the
Speaker 1: set goals and and really think about self improving themselves
Speaker 1: and and and getting ready for a career. But you
Speaker 1: you do more than push college students. You push the SEC.
Speaker 1: You fished, the Department of Labor. You push Finro, which
Speaker 1: is the brokerage world's self regulating organization. Let's let's talk
Speaker 1: little bit about how you found your way from the
Speaker 1: practice of law into finance and ultimately into academic How
Speaker 1: how did you find your way into finance as a lawyer? Now,
Speaker 1: it goes back to college years. You know. When I
Speaker 1: was going to college, I was working during the day
Speaker 1: at wal Disney World. I was a Disney character and Uh,
Speaker 1: I just remember all the time having a book about
Speaker 1: stocks or bonds. Uh. This is probably about nineteen eighty
Speaker 1: or so, tucked away in in my beer costume, and
Speaker 1: during breaks off stage, I'd be reading it. So you
Speaker 1: were a bear reading about stocks. There's some there's some ironing.
Speaker 1: I know. Yeah, that's that's that's neat. Uh. Yeah, you
Speaker 1: know ours blue and bear Bear and Little John and
Speaker 1: Goofy as well. Just my my clients used to say
Speaker 1: that they had a Goofy attorney. Uh, we're a bearish adviser.
Speaker 1: It's the same thing. So you're reading about stocks. But
Speaker 1: how do you make the transition from being a lawyer
Speaker 1: to to being full on in finance. Well, I was
Speaker 1: going to state planning and tax attorney, and and I
Speaker 1: got recruited to help a major financial services company, Uh,
Speaker 1: attack the four one K market with a retirement planning
Speaker 1: program and that lasted for about six months. UH enjoyed.
Speaker 1: It was glad to see the program kind of in
Speaker 1: because it involved flying up here to New York and
Speaker 1: back from Florida, where I was at the time, every
Speaker 1: week for twenty six weeks straight. But after that, UH,
Speaker 1: some c p as that I had helped put together
Speaker 1: their firm from a legal standpoint approached me and said,
Speaker 1: you know, we're not very happy referring who we're referring
Speaker 1: to right now, and I said, well, I'm not very happy.
Speaker 1: So they asked me to help them interview UH financial
Speaker 1: advisors in our community, and we did about a dozen
Speaker 1: interviews and nobody even came close to to meeting our expectations.
Speaker 1: And then we got together and said, we just need
Speaker 1: to do this ourselves. We don't want to send our
Speaker 1: clients here and here. We we need to do it
Speaker 1: the right way, and we explored eight different business models
Speaker 1: and ended up forming our own independent registered investment advisory firm.
Speaker 1: So that's kind of fascinating. So you kind of it's
Speaker 1: the old joke about Dick Cheney. You interviewed a lot
Speaker 1: of people for vice president and finally said there's no
Speaker 1: capable I'll do it. That that turned out to be true.
Speaker 1: Um so what then led to the transition to academia.
Speaker 1: You did that for a number of years. What brought
Speaker 1: you back to college? You know, if you're a good
Speaker 1: financial advisor, you're you're really a good educator. You like
Speaker 1: counseling and and kind of teaching colleges counseling on mass
Speaker 1: in essence, so instead of doing it one on one,
Speaker 1: you're doing it in front of a whole room full
Speaker 1: of minds. To be most and I always thought i'd
Speaker 1: get into teaching. When I was in law school. I
Speaker 1: would run study groups of a hundred people, and you
Speaker 1: know that the first year students, as a third year student,
Speaker 1: I'd be giving them a study instruction. But at the
Speaker 1: opportunity resented itself and I rushed for it because and
Speaker 1: I've never looked back, because that the students. It's so
Speaker 1: great to see them transform, even over the course of
Speaker 1: a semester, especially over two or three years. And I
Speaker 1: just love going to work at every day at Western
Speaker 1: Kentucky University. It's just a fantastic place to be. So
Speaker 1: so speaking of educating and counseling, in the last minute
Speaker 1: or so we have you've been pretty active on Twitter.
Speaker 1: You've been an active blogger for it seems at least
Speaker 1: five years. How do you find those mediums um are
Speaker 1: in terms of trying to get a message out. I'm
Speaker 1: pretty surprised when I go to industry conferences that the
Speaker 1: number of people who come up to me and and
Speaker 1: said that they've read my blogs and and we have
Speaker 1: a nice discussion about it. Um. I found you through Twitter.
Speaker 1: That's how I first. You know, I've been running about
Speaker 1: the fiduciary standards. Yes, yes, I thought it was kind
Speaker 1: of a lonely thing. And there's this guy, Ron Rhodes,
Speaker 1: just scorched earth, destroy everything in his path. I'm like,
Speaker 1: I have to follow this guy. Do people comment to
Speaker 1: you about Oh, I follow you on Twitter? I know
Speaker 1: who you are from that? Oh? Absolutely yes. I I
Speaker 1: don't really hold things back very much. I'm a little
Speaker 1: bit on the blunt side when it comes to things
Speaker 1: like so, I'm just I'm just a big soft bear.
Speaker 1: Is that what it is? I'm Barry rid Hilts. You're
Speaker 1: listening to Masters in Business on Bloomberg Radio. My special
Speaker 1: guest today is Ron Rhodes, Professor Ron Rhodes of Western Kentucky, University.
Speaker 1: He is an expert on fiduciary standards, has been a
Speaker 1: gadfly for the sec Department of Labor and especially finn Roe.
Speaker 1: We're gonna talk a little bit about that in a
Speaker 1: little while. Let's talk a bit about the financial planning industry.
Speaker 1: Where you have lots of background and and lots of
Speaker 1: published work. What do you think clients shouldn't expect from
Speaker 1: their relationship with a financial advisory In one word, trust
Speaker 1: and and and if you look at trust, it's really
Speaker 1: got three elements to it. The first is that the
Speaker 1: advisor before you is a true expert in what they do.
Speaker 1: The second is they're gonna put your best interests forth
Speaker 1: and keep those paramount above theirs. It's not about their
Speaker 1: commission also selling whatever product as the highest um bonus
Speaker 1: on it. It's about the client's interest. First, Yes, there
Speaker 1: are to be compensation that should be reasonable, agree to
Speaker 1: in advance, transparent, absolutely completely transparent, and and then work
Speaker 1: under that constraint to go out and find the best
Speaker 1: investment strategies and thevest best products to implement those strategies
Speaker 1: for the client. And lastly, it's candor. You know a
Speaker 1: lot of times clients really need to hear something they
Speaker 1: may not want to hear, like spend less money or
Speaker 1: uh control thyselves in some way, or you know, keep
Speaker 1: the emotions down, you know, stick with this market that
Speaker 1: we have conversations with people. Sometimes I'll get emails with
Speaker 1: people say I have this big inheritance and I want
Speaker 1: to seed four different hedge funds and whichever one gives
Speaker 1: me the best returns, That's what I'm giving my money to. Like,
Speaker 1: you understand game theory, right, you understand you just gave
Speaker 1: these guys an incentive to do nothing but throw hail
Speaker 1: Mary's because if they lose, hey, the odds are against
Speaker 1: them getting your money. And if they win, they they're
Speaker 1: not going to be able to put up those numbers again.
Speaker 1: So you've created a terrible situation. People don't seem to
Speaker 1: think those sort of things through. I think financial advices
Speaker 1: through a lot of keeping clients from making big mistakes
Speaker 1: and behavioral counseling. Absolutely that. In fact, almost every financial
Speaker 1: planner I've ever talked to you says, you know, I
Speaker 1: wish I had a minor in psychology, and and it's
Speaker 1: that important that that's quite interesting, So let's talk about that.
Speaker 1: That's one of of things I think the industry is
Speaker 1: doing right. What else is the industry doing right? And
Speaker 1: what else is it doing wrong? Well, I think what
Speaker 1: it's doing wrong? And where we really think seen things
Speaker 1: change over the last forty years as we went from
Speaker 1: this fixed commission structure and abandoned that in nine that
Speaker 1: was a good thing, but it's been replaced with a
Speaker 1: whole bunch of variable compensation where people can get paid
Speaker 1: a lot more money to sell one product over another,
Speaker 1: and just a ton of conflicts of interest and a
Speaker 1: lot of hidden fees. Clients have no idea what they're paying.
Speaker 1: I have had many a perspective client client coming to
Speaker 1: see me and they say, you know what, I've never
Speaker 1: paid my broker a dollar. You know, I get that
Speaker 1: on the bond side of things, they don't charge me
Speaker 1: any commissioners bonds. Well, that's because it's it's not you know,
Speaker 1: there's a difference between an agency transaction and a principal transaction.
Speaker 1: They're selling you by on is at a markup, not
Speaker 1: a commission. It's even worse right, No, no, no, it
Speaker 1: doesn't show that on any of my confidence. And then
Speaker 1: when I when I take them through and say here's
Speaker 1: the commission. Here's the twelve B one fees. Here's the
Speaker 1: payment for shelf space that the brokerage firm is getting
Speaker 1: of some amount. Okay, Like it's like it's potato chips
Speaker 1: in the supermarket if you want to be on the
Speaker 1: end gap. They're being the supermarkets for that placement. And
Speaker 1: they're soft all the compensation, and there's other revenue shary
Speaker 1: and gifts and the like. And when you start explaining
Speaker 1: this to clients, they typically get really angry because they
Speaker 1: thought that this guy was their best friend and it
Speaker 1: turns out that they were a very good product salesperson.
Speaker 1: The the old joke is if you want a friend
Speaker 1: on Wall Street, get a dog, And it's really true,
Speaker 1: because they're there to do the business of their firm.
Speaker 1: And I'm not saying there's anything wrong with that, but
Speaker 1: it's important that investors educate themselves and find out how
Speaker 1: that guy who's not charging you for those bond transactions
Speaker 1: is driving a really nice car and living in a
Speaker 1: really big hal us and doing it without much training,
Speaker 1: and what they do. It's almost as if sometimes when
Speaker 1: people get hired into some of the berg which firms nowadays,
Speaker 1: they get training and how to sell, of course, but
Speaker 1: they don't really get training and investment strategy and investment
Speaker 1: portfolio management, tax tax efficient investing, uh, all the things
Speaker 1: that they really should know to be experts, to know
Speaker 1: where close to be in ANET. Now that is a
Speaker 1: change from years ago, because I know when I was
Speaker 1: coming up. Look, I've been in this business for twenty
Speaker 1: plus years. I had friends that started at mary Lynch,
Speaker 1: started at Morgan Stanley, started at bear Stearns, and these
Speaker 1: guys went through a rigorous six month training program. Do
Speaker 1: these exist anymore? They have to still be around somewhere,
Speaker 1: or has the industry given up on training people and
Speaker 1: it's cfps and c f A s that or where
Speaker 1: all the training take place. I think for a large
Speaker 1: part they went away. And and the old model that
Speaker 1: you perhaps grew up in, the old party marty commercial, Uh,
Speaker 1: we make money the old fashioned way we earned it,
Speaker 1: that largely disappeared and it's now just beginning to get
Speaker 1: back come back. In part of this because people want
Speaker 1: advice people, and it's really a lot more complicated world
Speaker 1: out there. Sure financially tax wise, people don't need just
Speaker 1: investment advice. They need financial advice, financial planning, and and
Speaker 1: that's where you see things like the UH Certified Financial
Speaker 1: Planning Board of Standards with their CFP certification becoming really
Speaker 1: priced as a standard for investors. So we've seen the
Speaker 1: industry change a lot over the past couple of years,
Speaker 1: past couple of decades. What do you think are the
Speaker 1: next couple of changes we're gonna see going forward? UH
Speaker 1: this year is likely to be transformational. Transformational. Now we
Speaker 1: know the Department of Labor Fiduciary standards coming. We're gonna
Speaker 1: talk more about that in our last segment. But what
Speaker 1: else do you see changing the landscape for investors? Well,
Speaker 1: the fiduciary Standards is going to change it and in
Speaker 1: a lot of different ways. So let's look at the
Speaker 1: longer term impacts of this. There are some things that
Speaker 1: exist now which a lot aren't you going to go away?
Speaker 1: If not by the regulators themselves, just from a standpoint
Speaker 1: of having a more competitive marketplace. One, fees likely to
Speaker 1: be gone, okay, payment for self space okay, proprietary funds
Speaker 1: a lot less, a lot less of that. How much
Speaker 1: of this is driven by the massive inflows we see
Speaker 1: into Vanguard. That's just in the last minute. We have
Speaker 1: Vanguard is sucking up all the oxygen the room, and
Speaker 1: all the active managers out there seem to be flailing.
Speaker 1: Is that a competitive factor that's driving this to some degree? Yes,
Speaker 1: because once you start eliminating all these hidden fees and
Speaker 1: you get down to lower fees, all the academic research
Speaker 1: shows lower fees means higher return for investors, and investors
Speaker 1: to starting the catch onto this, I'm Barry Ridhults. You're
Speaker 1: listening to Masters in Business on Bloomberg Radio. My special
Speaker 1: guest today is Professor Ron Rhodes. He's from Western Kentucky
Speaker 1: University and a specialist in various forms of financial planning
Speaker 1: and the rules and regulations and standards that governed the
Speaker 1: different participants in the market. Let's talk a little bit
Speaker 1: about this and and and start out really broadly, put
Speaker 1: on your lawyer's hat and explain what is it that
Speaker 1: a duty of care is, who's it owed to and
Speaker 1: why is this important? Well, for financial services, what it
Speaker 1: means is you have to have a certain level of
Speaker 1: expertise and apply that expertise uh in designing investment strategies
Speaker 1: and selecting investment products. And that's part of a duty
Speaker 1: of care of the fiduciary standards of duty care. The
Speaker 1: other part is the duty of loyalty, which means you've
Speaker 1: got to keep the client's best interest paramount. What's interesting
Speaker 1: is that most brokers who are not acting as fiduciaries
Speaker 1: don't have either of these duties. They're not obligated to
Speaker 1: have any sort of expertise that when they're not obligated
Speaker 1: to with the clients uh interest. Fact, they're just governed
Speaker 1: by a suitability standards something that's far less. It's amazing
Speaker 1: in this world that we have so many service providers
Speaker 1: that have a duty of care and what the suitability
Speaker 1: doctrine really does. It was adoptive way back in the
Speaker 1: earlier twenty century when the whole theory of negligence was
Speaker 1: developing in the law was. It basically was enacted because
Speaker 1: we didn't want to hold brokers responsible for stock recommendations
Speaker 1: when they were only executing stock trades and listen, stocks
Speaker 1: go up and down. You can't hold people responsible for
Speaker 1: good faith bad choices. But suitability is such a low standard.
Speaker 1: I used to call that don't sell I p o
Speaker 1: s to grant MS standard. But but there's a little
Speaker 1: more to it. Explain exactly what suitability means and how
Speaker 1: much different that is than fiduciary Suitability essentially says, don't
Speaker 1: sell things that explode that you know we're going to explode,
Speaker 1: and perhaps for elderly clients, don't even sell firecrackers. All right,
Speaker 1: But suitability is basically says you don't have a duty
Speaker 1: of care. All you have to do is make sure
Speaker 1: that this investment could be held by this particular client.
Speaker 1: It doesn't have to be the best investment if it's
Speaker 1: in a taxable account, it doesn't have to be tax efficient.
Speaker 1: It doesn't have to be a low cost investment. In fact,
Speaker 1: it can be a very high cost investment. Yeah. And
Speaker 1: from the standpoint, it doesn't even require you to think
Speaker 1: about an entire portfolio together and how you can minimize
Speaker 1: the risk in that portfolio. It doesn't even require the
Speaker 1: application of what we've known for sixty five years now,
Speaker 1: modern PORTFOLI theory. So is it fair to say suitability
Speaker 1: is can be summed up as try not to be reckless?
Speaker 1: Is it? Is it that lowest standard? I think it
Speaker 1: actually allows people to be reckless. I think it's I
Speaker 1: think it's below that point, so recklessness, all right? It
Speaker 1: was reckless, but it wasn't unsuitable. Gross negligence perhaps is
Speaker 1: is outall and a suitability is really a standard that
Speaker 1: it's very difficult to actually say what it is. It's
Speaker 1: so vague. So so let's talk a little bit about
Speaker 1: the regulator in this space. The brokerage world has a
Speaker 1: s r OH, a self regulating organization formally NASDAC or
Speaker 1: any SDR. Now it's FINRA. You have been a major
Speaker 1: thorn in their side, mostly about this suitability standard and
Speaker 1: their opposition to the fiduciary standard. Tell us a little
Speaker 1: bit about your your relationship with FINRA. Let me take
Speaker 1: this to the back in night Senator Maloney who was
Speaker 1: the author of the Maloney Act that led to the
Speaker 1: creation of any s D which is now FINRAD. He said,
Speaker 1: the purpose of this s r OH is to create
Speaker 1: an organization that will gradually, over time raise the standard
Speaker 1: of conduct for those in the securities business to the
Speaker 1: various highest standard and the law, in other words, raise
Speaker 1: it to the fiduciary standard. That vision has never been
Speaker 1: put in place. You know, if you go back to
Speaker 1: the forties, uh findra it's its biggest accomplishment. It wrote,
Speaker 1: was uh not was preventing the separation of brokers from dealers.
Speaker 1: All right, well, that's a conflict of interest situation. They
Speaker 1: basically led to this huge conflict of interest in financial services.
Speaker 1: They maintained that when they adopted their first rule book
Speaker 1: in even though they acknowledged in their first newsletter that
Speaker 1: brokers are often fiducaries to clients, that they have a
Speaker 1: relationship of trust and confidence with there's nothing in the
Speaker 1: finer rule book. Now we're back then this has the
Speaker 1: word fiducry in it. So in the last minute we
Speaker 1: have in this segment, there was a time not too
Speaker 1: long ago when FINRA made a play to take over
Speaker 1: managing or supervising um the r I a world, the
Speaker 1: registered investment advisory world currently supervised by the SEC. You
Speaker 1: pretty much were a one man wrecking ball that stopped that.
Speaker 1: Tell us a little bit about how that happened. I
Speaker 1: think there were a lot of people involved in that
Speaker 1: effort to stop them. It was a bill that's coming
Speaker 1: out of the Senate and that was proposed, and there
Speaker 1: was just a lot of opposition from consumer groups for
Speaker 1: myself but many others to that to basically say, listen,
Speaker 1: we shouldn't be rewarding FINRA by giving them oversight of
Speaker 1: investment advisors. Yes, we need more oversight, we need more inspections,
Speaker 1: but this is not the way to do it. I'm
Speaker 1: Barry Ridhults. You're listening to Masters in Business on Bloomberg Radio.
Speaker 1: My special guest today is Professor Ron Rhodes. He is
Speaker 1: an expert on fiduciary standards and legal obligations that advisers
Speaker 1: owe their clients, namely the investment community. Let's talk a
Speaker 1: little bit about the fiduciary standard. Back in two thousand
Speaker 1: and eleven, as part of the Dodd Frank Rules, the
Speaker 1: SEC had a research a um put together a study
Speaker 1: on the appropriate standards for brokers and advisors and all
Speaker 1: sorts of people in the industry, and they put out
Speaker 1: this long research report. I actually published it on the
Speaker 1: blog some time ago. Uh that specifically said, and I'm quoting,
Speaker 1: all financial advisors and stockbrokers should be placed under a
Speaker 1: uniform fiduciary standard. First, what does that mean? And second,
Speaker 1: why hasn't that happened? Back in two thousand eleven that
Speaker 1: that study came out from the SEC staff, and we
Speaker 1: had spent a lot of time with the SEC myself
Speaker 1: and many other fiduciary advocates, educating them about the fiduciary
Speaker 1: standard and why it was so important and what this
Speaker 1: would mean if it was adopted, And it came out
Speaker 1: with what I thought was a pretty strong report on it,
Speaker 1: very very strong. Yeah, you can you can tell by
Speaker 1: the pushback to it immediately from the rest of the industry.
Speaker 1: The SEC commissioners did not sign off on. That is
Speaker 1: not signed by any SEC commissioner. Uh. Kind of an
Speaker 1: indication of the split and the commission that has persisted
Speaker 1: for probably at least a decade now. UH. But you
Speaker 1: know now that the situation at the SEC has quite changed.
Speaker 1: You have you always have staff turnover, and the senior
Speaker 1: staff at the SEC, they all worked on the Wall
Speaker 1: Street before, uh, and they a lot of them worked
Speaker 1: at the SEC, went to Wall Street, came back. A
Speaker 1: little bit of revolving do going on tremendous And one
Speaker 1: of the interesting things is, and it doesn't happen for
Speaker 1: all the SEC staff, but but it does happen generally
Speaker 1: between New York and Washington. You leave Wall Street, you
Speaker 1: get a bonus to go work at a government agency
Speaker 1: and a promise that you'll have a job when you
Speaker 1: come back, Does that influence what you do in Washington?
Speaker 1: Certainly does. Yeah, there's no way around the fact that
Speaker 1: it's going to influence your decision making. And right now
Speaker 1: the chair of the SEC is surrounded by senior staff
Speaker 1: that really hold an allegiance to to Wall Street and
Speaker 1: don't want the fiduciary standard. M that's amazing that. Um,
Speaker 1: so let's talk a little bit. You you reference the
Speaker 1: fiduciary standard in an earlier segment, but let's let's get
Speaker 1: into that again. Explain exactly what the So you're an investor,
Speaker 1: you're you open a brokerage account or you open a
Speaker 1: an account with an advisor. What should the fiduciary standard
Speaker 1: mean to you as an investor? First, that you're dealing
Speaker 1: with an expert, someone who if you say I want
Speaker 1: to prove in portfolio, that's what they'll give you. And
Speaker 1: and and generally speaking, this in a assumption that that's
Speaker 1: what you want, although not all advices live up to it.
Speaker 1: And and second this what really makes the fiduciary standard
Speaker 1: distinctive is the duty of loyalty, the duty to keep
Speaker 1: your best interest first paramount best interest of the client
Speaker 1: over that of the advisor and the and the only
Speaker 1: way to do that is to avoid conflicts of interest.
Speaker 1: They say, Hey, we agree on how much I'm gonna
Speaker 1: get paid, I'm going to do my best to not
Speaker 1: receive any third party compensation whatsoever. When you say do
Speaker 1: your best, you know someone's giving you a check, you
Speaker 1: know it. It should be pretty easy to not get
Speaker 1: paid by anybody but the clients or am I wrong?
Speaker 1: Generally it's easy. But for example, I'll go to a
Speaker 1: custodial conference, uh that I use the custodian for my
Speaker 1: client funds, and I don't pay for the education at
Speaker 1: the conference. I pay my own way there the hotel,
Speaker 1: but they give some free food and and even some
Speaker 1: free entertainment and up in the in the in the boothroom.
Speaker 1: So that that's a minor conflict of interest that I
Speaker 1: would say, it's not going to influence my judgment at all.
Speaker 1: But if I went to twelve of those conferences a
Speaker 1: year of mine, right, So so you have to there
Speaker 1: aren't small conflicts, and everybody has, but it's avoiding those
Speaker 1: major conflicts. But even if you don't avoid a conflict,
Speaker 1: then this is the key to the duty of loyalty.
Speaker 1: A lot of people out there, including someone Wall Street lawyers,
Speaker 1: they think that all that's required is you have to
Speaker 1: disclose the conflict of interest. But that's not what the
Speaker 1: fiduciary laws. Interests must come first. And so having a
Speaker 1: conflict of interest is a breach of a fiduciary duty.
Speaker 1: You have to cure that breach. How do you do that?
Speaker 1: You disclose the conflict and its ramifications to the client.
Speaker 1: You do that affirmatively. You make sure the client understands,
Speaker 1: and that's a duty that's subjectively applied. You get the
Speaker 1: clients informed consent. And here's the key. No clients ever
Speaker 1: going to consent to be to be harmed. One would help.
Speaker 1: So so if you say, well, I'm going to get
Speaker 1: an extra fifty basis points when I sell you this
Speaker 1: on an ongoing conversation, as opposed to the exact same
Speaker 1: product elsewhere. That course, by the way, when I've reviewed portfolios,
Speaker 1: I've seen people with SMP holdings at like one in
Speaker 1: a quarter internal expense or one percent. You can pick
Speaker 1: that up at a vanguard or a dimensional for almost nothing,
Speaker 1: eight bits, twelve bits something in insane six basis points.
Speaker 1: How can anyone justify an index fund with a one
Speaker 1: internal expense rate. You can't. You can't, and there's way
Speaker 1: of doing it. So so we talked about the the
Speaker 1: SEC study and how they proposed a uniform standard. That
Speaker 1: hasn't happened, but the Department of Labor has now stepped
Speaker 1: in and said, retirement accounts are a form of compensation.
Speaker 1: We cover compensation, and therefore we're going to cover the
Speaker 1: standards for people who are managing these because essentially they're
Speaker 1: managing compensation and therefore we're implying the fiduciary standard. How
Speaker 1: did that come about? Well, Assistant Secretary Phyllis Borsey over
Speaker 1: at the Department of Labor, who are really admire When
Speaker 1: she came on board about seven years ago, she asked
Speaker 1: her staff what are the things that we can do
Speaker 1: to improve retirement security for for Americans? And they came
Speaker 1: up with a list and some two of those things
Speaker 1: have already been implemented. Disclosures to plan sponsors and disclosures
Speaker 1: to plan participants. They've already had a huge impact. Once
Speaker 1: you disclose all the fees and costs, attends to lower things.
Speaker 1: I can't by the way, I can't tell you how
Speaker 1: often we look at a four one K plan and
Speaker 1: the answers, who the heck put this together? Oh, the
Speaker 1: boss's brother in law did it. That sort of stuff
Speaker 1: has really tailed off because there's an obligation on employer
Speaker 1: to they have a food dociary standard. If they're offering
Speaker 1: a four one, they do, and it's uh. They need
Speaker 1: employers that they're not in the business of of creating
Speaker 1: portfolios for their employees. They run a business, so they
Speaker 1: need a trusted advisor. And if they don't have a
Speaker 1: trust advisor, the employer is the one who is on
Speaker 1: the hook. But under the suitability standard, if some broker
Speaker 1: recommend it, here's twenty funds and all horrible funds. The
Speaker 1: brokers down on the hook, and that's that's a real problem.
Speaker 1: Not usually the aforementioned brother in law. That's department Well,
Speaker 1: Department Labor is in the middle of fixing this with
Speaker 1: something called its conflict of interest rule, supposed to be finalized,
Speaker 1: come out later this spring and hopefully hopefully implemented by
Speaker 1: the end of two thousand sixteen, and it's going to
Speaker 1: basically say, if you're providing advice to either define contribution
Speaker 1: plans that are government by aresa like four one K
Speaker 1: plans some four three bis or if you're providing advice
Speaker 1: to IRA accounts, then you are a fiduciary and and
Speaker 1: all these fiduciary obligations result. Imagine when going from about
Speaker 1: twenty of of publicly traded investments being subject to a
Speaker 1: fiduciary standard, mostly in defined benefit plans and endownment funds,
Speaker 1: to somewhere between forty that's a tipping point. Yeah, that's massive.
Speaker 1: I will tell you in my own office, outside of
Speaker 1: the four oh one case stuff I would say about
Speaker 1: the portfolios are in i ras, people have rollovers they
Speaker 1: set up there. That's a huge, huge change. So about
Speaker 1: half of the total assets under management are going to
Speaker 1: be governed by a fiduciary standard by the time this
Speaker 1: year rolls around. Can anything stop this rule from being
Speaker 1: put into effect? Well? Wall Street is really heavily, heavily
Speaker 1: alarming in Congress to stop it. They didn't succeed in
Speaker 1: the budget negotiations back in December. That was really their
Speaker 1: biggest chance. Uh. They're still trying desperately to get some
Speaker 1: bills past. Uh. I'm going down to d C right
Speaker 1: after this to to to meet on Capitol Hills. To
Speaker 1: try to stop some of that, A lot of this
Speaker 1: a D organizations that are pro fiduciary supporting the rule.
Speaker 1: I think it's got a really really good chance of
Speaker 1: getting through this year. That that's that's really quite quite amazing.
Speaker 1: For the life of I've I've seen all these arguments
Speaker 1: against it, which will come down to, hey, we're gonna
Speaker 1: lose a lot of money and fees. But without me
Speaker 1: being glib or snarky, are there any credible arguments against
Speaker 1: the fiduciary standard? Not? Not really. You know, it's not
Speaker 1: just me because I look, we both went to law school.
Speaker 1: You know, you know what mood court is. You have
Speaker 1: to adopt the other parties argument and argue on their behalf.
Speaker 1: You have to be able to switch hats, and you
Speaker 1: cannot understand your own position unless you can argue your
Speaker 1: opponents position. And I feel like I have a blind
Speaker 1: spot with this because, for the life of me, I
Speaker 1: cannot find a single credible our argument other than we're
Speaker 1: gonna lose a lot of of fees if we go
Speaker 1: from suitability to fiduciary. Uh. You know, I would say this,
Speaker 1: there's there's always a tension in our society between one
Speaker 1: one body of thought that says people have to have
Speaker 1: self responsibility for what they do themselves. And there's another
Speaker 1: body of thought that says, well, wait a minute, the
Speaker 1: law needs to protect people. Sometimes it needs to be
Speaker 1: a little paternalistic, and people hate that word paternalistic. Uh.
Speaker 1: And financial services, really, the question is does the average
Speaker 1: American does almost any American can they? Can they navigate
Speaker 1: this complex financial and investment world themselves when people are
Speaker 1: trying to sell some really lousy stuff to them? Uh,
Speaker 1: my experience that is maybe one in a thousand. We've
Speaker 1: been talking with professor Ron Rhodes of Western Kentucky University.
Speaker 1: If you enjoy this conversation, be sure and hang around
Speaker 1: for a podcast extras where we keep the digital tape
Speaker 1: rolling and continue chatting about all sorts of things. Be
Speaker 1: sure and check out my daily column on Bloomberg View
Speaker 1: dot com. Uh. Follow me on Twitter at rid Halts.
Speaker 1: I'm Barry rid Halts. You've been listening to Masters in
Speaker 1: Business on Bloomberg Radio. Welcome to the podcast. Uh, this
Speaker 1: is the portion too loud. Welcome to the podcast. I
Speaker 1: have as a my special guest this week, Ron Rhodes. Ron,
Speaker 1: thank you so much for coming all the way up
Speaker 1: from d C and doing this. I know you're heading
Speaker 1: back down to d C. Um, you're gonna you're gonna
Speaker 1: meet with a bunch of UM organizations and people on
Speaker 1: the hill about the fiduciary standard. Who who's on your
Speaker 1: hit parade? Are you're gonna be seeing the Consumer Financial
Speaker 1: Protection Board? Are they on your your list? Sometimes they are,
Speaker 1: but not this trip. Typically, uh, it's uh the Senate
Speaker 1: Finance uh and Senate Banking Committees, House Education, Workforce Committee,
Speaker 1: Senator Warren she as part of your yes in the past. Uh,
Speaker 1: not not on this trip. You know, there's so many
Speaker 1: senators and representatives theory every trip we in, every trip
Speaker 1: to d C, it's usually seeing you know, about five
Speaker 1: a day, either them or their staffs, their Legislative Council,
Speaker 1: their General Council, or the committee staff, very influential committee staff.
Speaker 1: But also you know, while when there, we typically reach
Speaker 1: out to some of the organization's uh uh visits to
Speaker 1: the SEC. There's still some stuff going on there, right.
Speaker 1: Does it feel like the tide is shifting on this
Speaker 1: on this on this fight? Is it? I feel like
Speaker 1: it doesn't seem like an uphill battle anymore? It seems
Speaker 1: like this is going to happen. Definitely. I would say
Speaker 1: once we got past the December budget negotiations, I don't
Speaker 1: see anything on the horizon that is a hurdle to
Speaker 1: this being implemented. Is not to say that the most intensive,
Speaker 1: coordinated lobbying effort that Capitol Hill has ever seen is
Speaker 1: not occurring as we speak right. Oh. Absolutely, every time
Speaker 1: I go to Capitol Hill is like, Wow, we can't
Speaker 1: believe it. We've seen forty fifty people on the anti
Speaker 1: fiduciary side, including the CEOs of some of our big
Speaker 1: investment banks, making personal trips down there in the lobby. Well,
Speaker 1: they got stock options at risks, so they they see
Speaker 1: forty or fifty of them for every one person on
Speaker 1: the pro fiduciary side, and they say, we're very happy
Speaker 1: to see you. Well, I've been actually going back and
Speaker 1: forth with the sene Warre and staff of having her
Speaker 1: as a guest, and I would love to discuss this
Speaker 1: with her the next time you're in your her office,
Speaker 1: Point her to this podcast, get her down in New
Speaker 1: York for this um. So let's go over a few
Speaker 1: of the questions that that we missed during the actual
Speaker 1: broadcast portion um and we were all over the map.
Speaker 1: So let's talk a little bit about the proper roles
Speaker 1: of advisors. I never got to that question. You mentioned
Speaker 1: expertise and and fiduciary standard, But a broker and an advisor,
Speaker 1: how do they operate as counselors to investors? What should
Speaker 1: their proper roles be? I I think that a good
Speaker 1: financial counselor is a steward of not only wealth, but
Speaker 1: also the client's hopes and dreams. And and when we
Speaker 1: think about wealth and the accumulation of wealth, that's not
Speaker 1: an ends, that's a means to an end. And what
Speaker 1: do you do with wealth is you buy things like
Speaker 1: financial security, or you buy time that you can spend
Speaker 1: a better develop your relationships and maintain relationships with family
Speaker 1: and friends. Or or you explore the world with it
Speaker 1: in some way, expand your horizons. Or you give back
Speaker 1: to the community in some way. Uh, And and all
Speaker 1: of those things. If you ask what is the purpose
Speaker 1: of all those things, it all leads the one thing, happiness.
Speaker 1: And and not happiness as a destination, but happiness every
Speaker 1: day along the journey. And so I really think financial
Speaker 1: advisors do that. They they are stewards of clients happiness.
Speaker 1: Quite quite interesting. You know, we never got to talk
Speaker 1: about the robo advisors. Any thoughts about that. That that's
Speaker 1: kind of an interesting, uh um change over the past
Speaker 1: couple of years. I think it was a change that
Speaker 1: was developed from software that financial advisors have been using
Speaker 1: for over a decade for rebalancing portfolios tax efficiently. Also
Speaker 1: software that has been used to gather client information more efficiently,
Speaker 1: and also report out, especially portfolio reporting software online updated
Speaker 1: every day. And you combine those three things with a
Speaker 1: slick interface, and you adopts a mass market market methodology
Speaker 1: to it lower the fees, and and that's essentially where
Speaker 1: a robo advisor is. Uh, it's been an interesting development.
Speaker 1: I'm not sure how long it's gonna last. Uh it'll
Speaker 1: last till the next major financial crisis when people don't
Speaker 1: know what they have to do with themselves. Look, well,
Speaker 1: it depends. Uh. You know, we talked about this the
Speaker 1: other day in the office. Asset allocation is a commodity product.
Speaker 1: It's it's inexpensive of free, but advice, and good advice
Speaker 1: is fairly expensive. I don't know how you can set
Speaker 1: a person's ouset allocation without having a personal conversation with
Speaker 1: them because it's about risk tolerance. And a lot of
Speaker 1: times you'll see the robo advisors do these online risk
Speaker 1: tolerance questionnaires. But they're helpful, they're helpful, but they're limited,
Speaker 1: the inherently limited. You cannot design a risk tolerance questionnaire,
Speaker 1: UH that has enough questions to really fire it out
Speaker 1: where someone needs to be as opposed to what their
Speaker 1: tolerance for risk is. It helps you, but people's need
Speaker 1: to take on risk is something completely different, and and
Speaker 1: that's set by a lot of different factors. You need
Speaker 1: to have this hand holding with the client to ascertain
Speaker 1: their need for risk. Yeah, investment management, you know, I
Speaker 1: tell my students I can train you to be a
Speaker 1: great investment portfolio manager in a year, but if you
Speaker 1: want to be a great financial planner, it's going to
Speaker 1: take you five to teen years. It is that? Is
Speaker 1: it just a matter of life experience and no the
Speaker 1: sort of cycles clients go through or is it something
Speaker 1: something else? Financial planning is both broad and what it
Speaker 1: covers tax planning and state planning, insurance issues, UH, maintaining debt,
Speaker 1: paying off debt, major expenditure is planning. So many people
Speaker 1: make huge mistakes in that area. Uh and investments is
Speaker 1: only one part of that. So you have this very
Speaker 1: broad area, but it's also pretty deep. And so the
Speaker 1: only way to start connecting those dots, you know, if
Speaker 1: you do one decision over here, how does it affect
Speaker 1: something way over here is through experience, and and it's
Speaker 1: gonna take five to ten years of experience, I think
Speaker 1: for most people to become an excellent financial planner. Hmm,
Speaker 1: that's that's fascinating. I'm glad I asked that question because
Speaker 1: we uh we missed it. UM a couple of questions.
Speaker 1: We talked a little bit about UH FINRA. One of
Speaker 1: the things I wanted to ask about was the so
Speaker 1: called hybrid model that seems to exist at some of
Speaker 1: the big brokerage firms. So they have a suitability standard
Speaker 1: most of the time, but to sell certain products they
Speaker 1: use a an r A, so someone's both an r
Speaker 1: A and a broker. So sometimes it's a fiduciary standard
Speaker 1: and sometimes it's just suitability. How do you resolve that
Speaker 1: that conflict of interest? You can't. You can't not for
Speaker 1: the same client if you're if you're trying to be
Speaker 1: a fiduciary to a client and at the same time
Speaker 1: in trying to sell them something. No person can wear
Speaker 1: two hats at the same time. It's it's an old
Speaker 1: adage that goes back really millennia. Basically says no man
Speaker 1: can serve two masters that one time, So you cannot
Speaker 1: reconcile those functions. You can also remember under fiduciary law,
Speaker 1: fiduciary is a status. You become a fiduciary to that client,
Speaker 1: which means the entire relationship should be subject to that
Speaker 1: fiduciary can't be a part time thing. It has to
Speaker 1: be correct and and and if people get sued, if
Speaker 1: if brokers get sued, they don't get sued under the
Speaker 1: Advisor's Act and the way the sec applies that they
Speaker 1: get sued under state common law and how that's applied.
Speaker 1: And fiduciary status attaches to the entirety of the relationship
Speaker 1: and and it really constrains what you're able to do.
Speaker 1: So wait, if if someone's working at a big brokerage
Speaker 1: firm that is a hybrid model where some of the
Speaker 1: work they do is brokerage and commission based and some
Speaker 1: of it is are i a fee based you're saying
Speaker 1: you really can't have both standards with the same client,
Speaker 1: because if they sue you, your brokerage behavior is going
Speaker 1: to be governed under the fiduciary standard. Is that what
Speaker 1: happens in certain states? Am I hearing that right? That
Speaker 1: is that is likely to be applied in certain states.
Speaker 1: The rules are not the same in every state the
Speaker 1: way the common law has developed. Of course, you're you're
Speaker 1: being sub it to arbitration here too. That I was
Speaker 1: about to ask that. So if you have the arbitration
Speaker 1: um agreement, so really that's the way out? Is that
Speaker 1: a way out of the arbitration agreement is to basically say, hey,
Speaker 1: I'm subject to arbitration rules, but there's a conflict because
Speaker 1: there's a fiduciary standard here, and therefore you're out. I
Speaker 1: haven't seen a lot of those cases. One would think
Speaker 1: that's a ripe area of for litigation. In fact, our
Speaker 1: complaint of breach of fiduciary is the most common complaint
Speaker 1: in arbitration, but but not that many of those make
Speaker 1: it forward because you have to overcome this threshold is
Speaker 1: the person of fiduciary, then you have to apply the
Speaker 1: fiduciary standard. One of the big problems in arbitration is
Speaker 1: is arbitrators are trained to do what's fair, and in essence,
Speaker 1: they're trained to ignore some of the procedural hurdles that
Speaker 1: it takes to get into arbitra to make a lawsuit
Speaker 1: under the thirty four Act, the Exchange Act, and they're
Speaker 1: trained to do what's fair with clients. But that application
Speaker 1: of fairness actually works to lower the fiduciary strict the
Speaker 1: strictness of the fiduciary standard in the way it's applied.
Speaker 1: How is that well, the fiduciary standard says, for example,
Speaker 1: when you have a conflict of induct you have to
Speaker 1: do all these things, and even then the transaccident you
Speaker 1: propose to a client must remain substantially fair even with
Speaker 1: informed consent. Well broker's the arbitration process. A lot of
Speaker 1: the arbitrators come from the industry, but they don't come
Speaker 1: from the r A side of the industry. They come
Speaker 1: mainly from the broker side of the industry. And if
Speaker 1: you haven't operated in a fiduciary environment orhere, you have
Speaker 1: not studied fiduciary law and what it requires and why
Speaker 1: fiduciary standards are applied. Your perception of what is fair
Speaker 1: is going to be dramatically different. Take a look at
Speaker 1: William Cohen's um work on the arbitration issues with FINRA.
Speaker 1: He's absolutely been brutal. He and I know that they've
Speaker 1: changed up some of the things they've done, but if
Speaker 1: you look in the ninety nineties and the two thousand's,
Speaker 1: it was not a pleasant situation to be a planiff in.
Speaker 1: Even if you were egregiously ripped off, it wasn't a
Speaker 1: place to go get justice. And Cohen just scorched earth
Speaker 1: columns on this, both here at Bloomberg and elsewhere. Um.
Speaker 1: You read some of his and it's like, how is
Speaker 1: this even allowed to exist? The New York Times just
Speaker 1: had a massive series on the problems with arbitration and
Speaker 1: how inherently unfair it is and how biased it is.
Speaker 1: Not just in finance, but any industry that has a
Speaker 1: arbitration clause they're running the arbitration process. It's very industry friendly.
Speaker 1: Arbitrators come in because they want to be rehired over
Speaker 1: and over again. It's amazing that this has developed the
Speaker 1: way it has. Yeah, we need to do away with
Speaker 1: mandatory arbitracition, there's no question about it. Wow, that that
Speaker 1: and what are the odds of that happening anytime arm soon?
Speaker 1: The SEC actually has authority to do that. But who
Speaker 1: controls the SEC? It's five commissioners, three three from the
Speaker 1: party that controls the White House to from the opposition party.
Speaker 1: And like you said, there's a lot of a lot
Speaker 1: of influence from Wall Street over the SEC. And it's
Speaker 1: really gonna take an extremely strong SEC chair and two
Speaker 1: at least two commissioners who are also extremely strong to
Speaker 1: to really start protecting consumers instead of protecting Wall Street
Speaker 1: in finer quite quite fascinating. So there was an article
Speaker 1: in the Wall Street Journal earlier this this month that
Speaker 1: specifically talked about the outflow of brokers two advisors. Have
Speaker 1: you noticed any trends in the industry about people leaving
Speaker 1: the money center banks and the big brokerage firms and
Speaker 1: either going to independence shops or gonna our a advisors
Speaker 1: where they're is a fiduciary standard? Hey, what's what's going
Speaker 1: on with that? Why is that happening? And what does
Speaker 1: this mean for investors? Uh? You see that and you
Speaker 1: see it accelerating. I think there's been several reasons for that.
Speaker 1: One is there's there's firms out there that are roll
Speaker 1: up firms we call them, that are actually recruiting brokers
Speaker 1: out of the wirehouse environment that the good teams. Uh,
Speaker 1: and they are fostering the process of getting out beyond that.
Speaker 1: As the article mentioned, a lot of the ties that
Speaker 1: they have in these deferred compensation packages are going away. Uh,
Speaker 1: and that's really gonna give brokers the freedom. Uh. When
Speaker 1: brokers do leave, about of the clients typically follow them.
Speaker 1: That's pretty healthy. Yeah, it's not to say that there
Speaker 1: aren't fights about that, but uh, they end up with
Speaker 1: about eight of the clients on average. That's a pretty
Speaker 1: healthy number. So despite all the anti solicitation provisions that
Speaker 1: you see and brokerage broker firm broker agreements UM, a
Speaker 1: lot of the clients are following them. I bet, I
Speaker 1: bet the average listener is not familiar with the broker's
Speaker 1: protocol which governs the process of hiring and recruiting brokers
Speaker 1: from UM major brokerage firms. Talk about that for a second,
Speaker 1: if you if you would, well, I was designed to
Speaker 1: eliminate the lawsuits that were flying between brokerage firms. And
Speaker 1: there's about four hundred brokerage firms that have signed on
Speaker 1: to that agreement, and for the life of me, I
Speaker 1: can't imagine why any investment advisory firm or even a
Speaker 1: smaller broker dealer who wants to recruit would sign that
Speaker 1: protocol because it's basically say, Okay, we get this team,
Speaker 1: we have to pay you some money and and that's
Speaker 1: how we resolve it. And and if if a team
Speaker 1: from a wire house wants to go independent, they can
Speaker 1: do that. They can start you on firm and go independent.
Speaker 1: Nobody's gonna pay for their clients. They just take the
Speaker 1: clients perhaps with them. So the way i've I've read
Speaker 1: the protocol rules are, if you hire somebody from a
Speaker 1: brokerage firm, here are the rules that the brokers must file.
Speaker 1: They can't take any documentation out with them. It's like
Speaker 1: a whole run of things. They could take names, email addresses,
Speaker 1: phone numbers, but in theory they can't take account numbers.
Speaker 1: It's kind of crazy, but it means when these people leave,
Speaker 1: there's no litigation. So to some degree it encourages or
Speaker 1: allows brokers to go without causing a lawsuit or a
Speaker 1: fear of a lawsuit from where they land. If they
Speaker 1: join another brokerage firm that's a member at the protocol,
Speaker 1: but a lot of them are going independent and not
Speaker 1: going that way, and that's where you still see the litigation.
Speaker 1: So this is not for the benefit of the investors.
Speaker 1: This is strictly for the benefit of the broker. It
Speaker 1: hurts the investor. And and here's a better a way
Speaker 1: of explaining why why does it hurt the investors? Well,
Speaker 1: what happens is your broker leaves, you want to follow them.
Speaker 1: The broker since transfer forms back over the broker firm
Speaker 1: is upset about this. They'll slow down the transfer process,
Speaker 1: they won't return calls. The client is not being served
Speaker 1: in the middle of all of this most of the time. Yeah,
Speaker 1: then the old firm is still calling the client trying
Speaker 1: to establish a relationship with another advisor at that firm,
Speaker 1: while the other broker who left is is out there
Speaker 1: also trying to deserve the client but can't get information.
Speaker 1: And it's just a mess for a client to be in.
Speaker 1: So what what should be that what should exist instead
Speaker 1: of this protocol? What's the proper way for this to happen?
Speaker 1: I think the solution is to recognize that financial advisors
Speaker 1: have investments in these client relationships just as much as
Speaker 1: firms do. And perhaps this client relationships should not be
Speaker 1: owned by the firm itself but ought to be shared
Speaker 1: with the financial advisor. And if a financial advisor leaves,
Speaker 1: whatever clients are taken, the financial advisor has to remit
Speaker 1: part of the fees from those clients for a certain
Speaker 1: number of years. But if those clients stay with the firm,
Speaker 1: the firm has to pay for part of that client
Speaker 1: relationship over to the financial visor. That's a fair way
Speaker 1: of doing it, and and it eliminates all this litigation.
Speaker 1: I can't imagine that ever happened that that that's amazing. Um.
Speaker 1: So as we see more people exiting the brokerage world,
Speaker 1: to the to the r I A side of things,
Speaker 1: to the fee only advisor side, that also is going
Speaker 1: to drive more assets into the fiduciary standard. That's fair state, absolutely.
Speaker 1: And advisors are leaving because a lot of times that
Speaker 1: the brokers firms then being sold told push this proprietary
Speaker 1: mutual fund, or push these bonds out that maybe long
Speaker 1: term bonds, or push this investment i p O initial
Speaker 1: public offering. The greatest commercial was the Schwabs put a
Speaker 1: little lipstick on this pig. I remember that. That's got
Speaker 1: to be ten years ago when it stayed with me
Speaker 1: because you recognize those people if you worked in the
Speaker 1: industry for any length of time. It's like, I know
Speaker 1: that guy. I watched people stand in front of the
Speaker 1: room and say something similar to that. It was quite amazing.
Speaker 1: There's really a difference between what brokers want to do.
Speaker 1: Most individual brokers want to do the right thing for
Speaker 1: their clients. Most brokerage firms are worried about their top
Speaker 1: line and bottom line, and and it's really this this
Speaker 1: huge disconnect there, that's a tent, that's an inherent tension
Speaker 1: between the employee and the employer the investor right, and
Speaker 1: it's going to get worse with the d O L
Speaker 1: role because the d O L roule says individual advisors
Speaker 1: cannot be paid more to ending on what they recommend,
Speaker 1: but at the firm level, the firms can still receive more.
Speaker 1: And and this this disconnect is going to become a
Speaker 1: much bigger And the result of that is brokers are
Speaker 1: not going to be happy when they go to work,
Speaker 1: and they want to go someplace where they will be
Speaker 1: happy going to work, where they will be on the
Speaker 1: same side of the table as their clients, and they'll
Speaker 1: enjoy working with their clients and in a more or
Speaker 1: less conflict free environment, put them on the same side
Speaker 1: of the table as a client and not have so.
Speaker 1: One would think market forces would have forced this to
Speaker 1: take place decades ago, but it really hasn't happened for
Speaker 1: a long long time. I mean this, this, this tension
Speaker 1: has existed for a while, and yet there's a certain
Speaker 1: comfort level with big name brand ferns who have a
Speaker 1: legal fiducial obligation to their shareholders, not their outside clients.
Speaker 1: I was at a a conference of large firms are
Speaker 1: speaking at it a couple of years ago Rotten Tomatoes,
Speaker 1: and I was talking about their need to evolve UH
Speaker 1: and how they could evolve to embrace the fiduciary standards,
Speaker 1: set up different divisions and the like. And at the
Speaker 1: end of that the first question was, but but run,
Speaker 1: we have a fiduciary duty to our shareholders. And my
Speaker 1: reply to that was simple and straightforward. Yes, you do.
Speaker 1: Your market share as a large firm is going down
Speaker 1: every year. Every day you keep up this trend, you
Speaker 1: won't have a firm for your shareholders. If you have
Speaker 1: a fiduciary duty to your shareholder. You have an obligation
Speaker 1: to change who moves by cheese people. This is this
Speaker 1: is not that difficult. Did it resonate or they still
Speaker 1: stuck in the look, if anybody's stuck in the quarterly
Speaker 1: dash for profits, it's got to be Wall Street farms.
Speaker 1: Did was a glimmer of recognition from any of the
Speaker 1: farms because, by the way, these aren't dumb people. These
Speaker 1: are I've met with, spoken to, interviewed a lot of
Speaker 1: these folks. They're wicked sharp, they're very smart, and yet
Speaker 1: it seems this is an issue that's a blind spot
Speaker 1: for a lot of them. It's it's hard to take
Speaker 1: a salesperson and adopt a fiduciary culture, and a fiduciary
Speaker 1: culture needs to be driven from the very top of
Speaker 1: the firm. And and there's such a big difference between
Speaker 1: a sales culture and a fiduciary culture. It's a big transformation.
Speaker 1: But I will say this, just over the last couple
Speaker 1: of years, we have seen some large firms adopt fiduciary platforms,
Speaker 1: some of them kind of halfway. We still have some
Speaker 1: conflicts of interest, but we're gonna eliminate bost of them.
Speaker 1: One firm, one platform, and one firm is almost completely
Speaker 1: conflict for it's an asset under management using E T
Speaker 1: f s, no proprietary products. Uh that has that firm
Speaker 1: has a history of not doing underwriting. But it's a
Speaker 1: fairly large firm. So I see the movement, but it's
Speaker 1: not to use names if you want to use names,
Speaker 1: all right. Uh so you know, I see the movement,
Speaker 1: and I see that they were recruiting a lot of
Speaker 1: the firms are recruiting individuals to teams now that the
Speaker 1: newer teams that the younger brokers are are forming. Teams
Speaker 1: are financial planners and entrepreneurs and uh those who go
Speaker 1: out and get clients and those who help run run
Speaker 1: the portfolios. Uh, much more fiduciary base, much more asset
Speaker 1: on the management base. Uh So there's some happening. But
Speaker 1: if you want to, you can't do a part way.
Speaker 1: If you do a part way, you're just you're just
Speaker 1: going to continue to see your market share shrink. So
Speaker 1: so I've drank the kool aid. So I it's hard
Speaker 1: for me to get back into a brokerage head mentality.
Speaker 1: I spent the first half of my career for us,
Speaker 1: not a trading desk and then as a strategist at
Speaker 1: a brokerage shop. So flipping to a fiduciary side was
Speaker 1: really a very easy transition for me. It's really hard
Speaker 1: to go back to that old way of thinking. But
Speaker 1: I would imagine at the biggest shops in the world,
Speaker 1: the Merrill Lynches and Morgan Stanley's and ubs is, isn't
Speaker 1: it so much easier for them to manage a fiduciary platform.
Speaker 1: You would think their compliance overhead and the costs and
Speaker 1: the arbitrations and all that stuff that practically goes away.
Speaker 1: You don't have to worry about guys running around doing
Speaker 1: stupid things, all the things we've seen, all the big scandals,
Speaker 1: the I p O spinning stuff, the after hours market
Speaker 1: trading stuff, the mutual fun timing nonsense, like everything about
Speaker 1: all the major scandals we've seen over the past decade
Speaker 1: or two outside of Bernie made Off. Had there been
Speaker 1: a pretty straightforward the only r I a fiduciary standard,
Speaker 1: all that stuff practically disappears, and the administrative and and
Speaker 1: compliance call us for these Look, if you have ten
Speaker 1: or advisors, that administrative compliance overhead and legal overhead is monstrous.
Speaker 1: You get rid of that incentive. Granted, your fees are
Speaker 1: dropping dramatically, but your costs are dropping much more dramatically.
Speaker 1: Or am I just naive and I've already drank from
Speaker 1: that from that bowl. If you get away from the
Speaker 1: door registrant and you go to a strict fee only,
Speaker 1: conflict free environment, the amount of complaints falls dramatically. Your
Speaker 1: your liability insurance per per advisor goes down dramatically because
Speaker 1: it's just not that much exposure. As you said, your
Speaker 1: compliance cost fall. You still need compliance systems, but they're
Speaker 1: set up differently, and and really the only way for
Speaker 1: the wirehouses to make this transformation is to really create
Speaker 1: units of feel only advisors and only. You're only going
Speaker 1: to be a registered investment advisor. You're not gonna sell
Speaker 1: any products. We're gonna set up some Chinese walls when
Speaker 1: it comes to, for example, buying bonds, uh, in buying
Speaker 1: it out of our own inventory. UH, we'll have a
Speaker 1: different trading desk that surveys the universe, including our offerings.
Speaker 1: So that you really need to to take a look
Speaker 1: at your structure and pretty much commit to having a
Speaker 1: completely different division UH. For these people to work under.
Speaker 1: Are any of the big firms experimenting with their own
Speaker 1: all right, let's set up a skunk works project project
Speaker 1: and just do an r I only fiducial only division,
Speaker 1: because that's where the wind is blowing or has has
Speaker 1: no one tried that yet? I think there are teams
Speaker 1: that are doing that in firms, but I haven't seen
Speaker 1: an entire division set up that way. One one would
Speaker 1: think that that sort of experiment is look for guys
Speaker 1: like you and me, this has let them keep doing
Speaker 1: it wrong. It just means more more clients, more assets,
Speaker 1: more advisors are coming over to our side of the street.
Speaker 1: If I was a wirehouse right now, I'd be doing
Speaker 1: what the roll ups are doing. I'd be buying registered
Speaker 1: investment advisory practices that be taking the best of those practices,
Speaker 1: forming a large r A firm out of it. I'd
Speaker 1: be transitioning brokers out of the current environment or the
Speaker 1: dual registered space, over to this feel only are a
Speaker 1: only space, uh, and allowing that to happen. Allowing this
Speaker 1: transition to happening, giving those people who say I don't
Speaker 1: like this brokerage environment anymore a place to go. And
Speaker 1: there's a little bit of that going home, But it's
Speaker 1: not as pure as I would I would say it
Speaker 1: needs to be, and it's not promoted as much as
Speaker 1: it should be. It's tough to get a leopard to
Speaker 1: change their spots, and it's tough to cannibalize your own business,
Speaker 1: you know. Not a lot of companies have that ability
Speaker 1: to engage in creative destruction of their own model. I
Speaker 1: used to love watching Apple I'm out with a new
Speaker 1: version of the iPod every year in the two thousands
Speaker 1: that pretty much destroyed the previous version. Wait, why am
Speaker 1: I gonna pay five hundred for this when half as
Speaker 1: much money I get twice as much storage. And every
Speaker 1: year they would do that, they wouldn't just introduce something
Speaker 1: at the top of the line. On the bottom of
Speaker 1: the line, they would destroy Not a lot of companies
Speaker 1: have the long term perspective to say, we're gonna destroy
Speaker 1: part of our own business because it's going to be
Speaker 1: so much better for the rest of us. Look at
Speaker 1: what they did with the iPad and then the iPhone.
Speaker 1: Once they went to the big iPhone, they started losing
Speaker 1: sales on the on the iPads. It's it's fascinating that
Speaker 1: the finance industry that funds. All these companies never really
Speaker 1: brought into that approach. The typical wirehouse firm on the
Speaker 1: brokerage business wants to make about two percent a year,
Speaker 1: two percent a year, two percent a year of the
Speaker 1: assets that they manage. That's not going to happen. That
Speaker 1: it's not gonna happen under a fiducry standard. That that's
Speaker 1: pretty uh stiff. The I think of our I as
Speaker 1: typically full service I as is one percent shops and
Speaker 1: sometimes a little cheaper. And the way you look at
Speaker 1: justifying that is, Okay, this is gonna be a better
Speaker 1: portfolio than you're gonna have access to. That will cover
Speaker 1: a third of your fee, and we're gonna talk you
Speaker 1: off the ledge when things get really bad, and that'll
Speaker 1: justify your fee. And by the way, here's all the planning,
Speaker 1: the wealth transfer, the estate planning, the generational sale of
Speaker 1: a business, all these different things that that a full
Speaker 1: service are I A firm offers that helps to justify
Speaker 1: their fees. But you can't really justify more than one
Speaker 1: percent if you're a fiduciary. Two percent is really a
Speaker 1: stiff fee. Yeah, for any for any substantial sized portfolio,
Speaker 1: two percent is really getting up there. And what's interesting
Speaker 1: is the feeling advisors they're prevailing in the marketplace. Just's
Speaker 1: not enough of him right now? Is that true? There's
Speaker 1: not enough? The only advisors there are about fifteen thousand
Speaker 1: as far as we can figure out, the only advisors
Speaker 1: out there. Uh, there's a lot more r A s.
Speaker 1: But a lot of them sell insurance products. They focus
Speaker 1: insurance or is the focus the investment or or a
Speaker 1: little of each. Probably the majority of it is focus
Speaker 1: of insurance. Because the state securiteous regulators said, listen, if
Speaker 1: you're gonna go out and sell a equity index anuity
Speaker 1: to some morning you're telling them to cash out of
Speaker 1: their UH account or whatever, you have to have be
Speaker 1: an investment advisor to give that advice to cash out.
Speaker 1: So they get the investment advisor license to then turn
Speaker 1: around and sell some annuity problems insurance license and insurance
Speaker 1: is wildly profitable as a salesperson the entire I would
Speaker 1: not want to be owning insurance company stock if I
Speaker 1: was a stock picker right now. Really, well, I know
Speaker 1: the first use premium, almost all of that is commissioned
Speaker 1: pretty close to it, and you've got variable nuities have
Speaker 1: very very high call structures and very high ongoing compensation
Speaker 1: and equity index and nuities. Some of them paying ten
Speaker 1: commissions are more. Uh. You apply a fiducry standards of this,
Speaker 1: and you create this, You create this army of purchasers
Speaker 1: representatives and kind of what you're alluding to, it's gonna
Speaker 1: it's gonna cut the asset managers fees dramatically. Asset managers
Speaker 1: are coming out with more and more products every day,
Speaker 1: four fee only advisors, but the fees and costs have
Speaker 1: to be transparent and they need to be a lot lower.
Speaker 1: And the asset managers, some of them are realizing this.
Speaker 1: Some of them are obviously stuck in quicksand some people
Speaker 1: have been calling this the Vanguard effect that whatever sector
Speaker 1: Vanguard plows its way into, in general, the fees tend
Speaker 1: to go down because Vanguard is so inexpensive. We see
Speaker 1: something comparable with Dimensional Funds. I had David Booth here
Speaker 1: is the CEO of UM of Dimensional Funds. We also
Speaker 1: had Bill McNabb from Vanguard. But there are another shop
Speaker 1: that's very inexpensive, and any space they go into, their
Speaker 1: competitors sort of see their their fees drop it and now,
Speaker 1: I think the robo advisors they've done two things. They've
Speaker 1: helped drive fees lower, but they've also made people realize
Speaker 1: that sometimes you need to speak to a person if
Speaker 1: you have anything more sophisticated than here's a quarter million dollars.
Speaker 1: I want to invest this for the next twenty years.
Speaker 1: So are we going to just continue to see fees
Speaker 1: come under pressure both for products and advice or or
Speaker 1: what does the future of that area look like. I
Speaker 1: think the investment fees will come down, and I think
Speaker 1: what we're gonna see is a split between investment advice,
Speaker 1: which degree can be commoditized at least it's scalable, and
Speaker 1: and finding interplanning advice, which really is not scalable. It's
Speaker 1: very time intensive, it's expertise intensive. Uh. Yeah, you can
Speaker 1: have basically the professional services model out there. We have
Speaker 1: a lot of junior partners, a lot of associates, and
Speaker 1: you give advice that way, and you take some of
Speaker 1: their fees, and the senior partners make more money. A
Speaker 1: professional services firm environment like a law firm, counterm and
Speaker 1: and and the top senior partners may make a million
Speaker 1: a year. But in a financial planning firm, but not
Speaker 1: ten million a year because they get they're just great
Speaker 1: at selling the high net worth clients. That's going to disappear.
Speaker 1: I mean, I I see exactly what you're saying. We've
Speaker 1: been watching this take place now for how many years.
Speaker 1: In the nineties, I was saying to people who were brokers,
Speaker 1: you should really think about moving to a feel only thing.
Speaker 1: This whole broke re universe is going away. But here
Speaker 1: it is. It's almost twenty years later, and they're still
Speaker 1: the biggest, most powerful opts on the street. So has
Speaker 1: has my forecast about this all moving to feel only
Speaker 1: been wrong? Or is it just taking longer? And it's
Speaker 1: eventually going in that direction. But you're fighting huge entrenched
Speaker 1: forces with massive marketing budgets. There's a huge amount of
Speaker 1: marketing going on there and that's hard to overcome. But
Speaker 1: I think your forecast is right because it's been happening
Speaker 1: gradually and and right now the investment independent investment advisory firms,
Speaker 1: independent broker dealer firms are going to have as much
Speaker 1: market share next year as the Wall Street firms, the
Speaker 1: wirehouse firms are in terms of what as much market
Speaker 1: assets on the management So you're talking about trillions, trillions
Speaker 1: of dollars right now. Now you hit the Department of
Speaker 1: Labor roll right, what's that going to do? One is
Speaker 1: a lot of the old brokers are going to say,
Speaker 1: I don't want to deal with this. I'm out of here,
Speaker 1: I'm retired. I don't want to give up. Oh you
Speaker 1: mean they're just done, They're going away. You know, I
Speaker 1: got all these clients with IRA accounts. I don't want
Speaker 1: to practice on the fiduciary environment. I was going to
Speaker 1: retire into I'm gonna I'm leaving. Let let me let,
Speaker 1: Let me let a cat out of the bag, let
Speaker 1: me let a secret out. It's not that hard to
Speaker 1: be a fiduciary if and if anything, it's easier because
Speaker 1: every time there's an issue, you just say to yourself, well,
Speaker 1: what's in the client's best interest. I'll do that. The
Speaker 1: rules on suitability are so much more complicated than just
Speaker 1: saying what's in the client's best interest. So why do
Speaker 1: these guys want to exit? They're just not used to
Speaker 1: that world, or to me, I'm I'm astonished by that comment.
Speaker 1: I've actually seen, Uh, the only affirms higher brokers, exceptional people,
Speaker 1: smart people bringing them into the fionly fiduciary side, and
Speaker 1: they never adopt to the fiduciary mindset. They never understand
Speaker 1: what it means to really put the client's interest first.
Speaker 1: They think that best interest means as long as I
Speaker 1: recommend a decent product. I'm okay, But it is a
Speaker 1: big transition from a sales culture to fiduciary culture, and
Speaker 1: some people just simply can't make that transition. Huh. That
Speaker 1: that that's quite astonishing to me. So I know I
Speaker 1: only have you for a certain amount of time. Let
Speaker 1: me get to some of my favorite, um my favorite
Speaker 1: questions that I asked all my guests. So we discussed
Speaker 1: your background. You worked as an attorney doing estates and
Speaker 1: and trusts early in your career. UM, and you told
Speaker 1: us how you moved into the to the financial services industry.
Speaker 1: I'm still amused by the thought of you in a
Speaker 1: blue bear costume in Disney walking around with a random
Speaker 1: walk down Wall Street book under under your arm. What
Speaker 1: was it really like that you were you were were
Speaker 1: in the costume reading about stocks and bonds or or
Speaker 1: is that an exaggeration? No, I had it tucked away.
Speaker 1: You know, you have so much padding in those bear costumes.
Speaker 1: It's easy to carry a book. You usually going from
Speaker 1: one part of the park to or the other. When
Speaker 1: you're in a costume, you get all stage. You remove
Speaker 1: your costume where most of it And that's when I
Speaker 1: pick up the book. And while i'm you know, rehydrating
Speaker 1: myself and catching my breath for the next thirty minutes set,
Speaker 1: that's when you you pull out the book and read it.
Speaker 1: I'm trying to visualize you in a bear costume with
Speaker 1: the head on a table, with like a cup of
Speaker 1: coffee and a cigarette reading a book. That's a great visual. Well,
Speaker 1: it was more like twelve glasses of water and the
Speaker 1: book is wrapped up in a plastic bag. Why because
Speaker 1: you you sweat so much. You're in a giant for
Speaker 1: costume in Orlando and it's ninety degrees in July, and
Speaker 1: and you're rehydrating and you're having so much fun. I
Speaker 1: can imagine. I can imagine that. Um, so we know
Speaker 1: what you did before you worked on Wall Street. Other
Speaker 1: than Walt Disney, who are some of your early mentors?
Speaker 1: Oh my, uh, you know, I think I think we
Speaker 1: take a little bit, if we're smart, we take a
Speaker 1: little bit of all the good things from almost every
Speaker 1: person that we have a significant relationship with. People that
Speaker 1: probably influenced me the most. I'd say one was Harold Levinski.
Speaker 1: You know, okay, who is he? So? Harold has a
Speaker 1: firm of Vinsky and Cats down in Coral Gables. I
Speaker 1: like to call him the Whites or the y Sage
Speaker 1: of the profession. He was chaired the CFB board probably
Speaker 1: fifteen years ago. Uh. He's a professor of Texas Tech
Speaker 1: and the masters program there, Masters of Financial Planning. Uh.
Speaker 1: He's just full of insights. He's written several books. Fifteen
Speaker 1: years ago, I'm sitting at an A I c P
Speaker 1: A conference on financial planning, thinking about getting into the industry.
Speaker 1: And he said, something I'll never forget is if you're
Speaker 1: going to become a financial advisor, commit to it fully
Speaker 1: the do this part time. And and I meaning that
Speaker 1: the life insurance salesman and accounts and others who are
Speaker 1: kind of dabbling in it really shouldn't be right. And
Speaker 1: I think that's completely true. This is a very time
Speaker 1: consuming profession to stay abreast of what's of what all
Speaker 1: the changes that happen. It's it's it's a nice challenge actually,
Speaker 1: And and this this need to make a full commitment
Speaker 1: to being an excellent financial planner. Uh, those words, those
Speaker 1: words meant a lot. And I think some other people
Speaker 1: that probably influenced me, probably a couple of the professors
Speaker 1: that I worked with now, one is Andrew had his
Speaker 1: Young Professor really the reason I joined Western Kentucky University.
Speaker 1: H he has this way of captivating the students in
Speaker 1: his classes. I've seen him do this and also connecting
Speaker 1: with students on a one on one basis that I'm
Speaker 1: just absorbing his lessons on that, on that. And then
Speaker 1: there's a Dr India Chaci, who you know, probably the
Speaker 1: toughest finance professor in the world, um in terms of
Speaker 1: the assignments that the case study methodology he uses, the
Speaker 1: amount of workload, and yet the students, when they have
Speaker 1: this enormous respect for him, they want to please him.
Speaker 1: They come out of his class learning so much and
Speaker 1: and just to be around these two individuals and and
Speaker 1: the other finance faculty at Western Kentucky University, it's it's really,
Speaker 1: it's been already just one semester there has been this
Speaker 1: tremendous experience and I'm looking forward to more interesting. Um.
Speaker 1: So let's talk about investors who might have influenced you,
Speaker 1: What investors have changed your thought process either about being
Speaker 1: a fiduciary about putting money at work in the market.
Speaker 1: Who who has influenced your thinking on the fiduciary front,
Speaker 1: without a doubt, the single most influences Professor Tomorrow Frankel,
Speaker 1: Boston University College of Law. And and she's been writing
Speaker 1: about fiduciary law. She's in her eighties now still teaching. UH.
Speaker 1: And she's just a wonderful writer and fiducier all things fiduciary.
Speaker 1: Who gave you the two thousand eleven Tomorrow Frankel Fiduciary
Speaker 1: Standard Award was that the Committee for the Fiduciary Standard. UH.
Speaker 1: That award is now given by another organization called the
Speaker 1: Institute for the Fiduciary Standard. I involved with both of them,
Speaker 1: both grade groups UH and UH. So it was the
Speaker 1: first time they gave that award. I had done some
Speaker 1: assistance with some of their projects and relating to lobbying
Speaker 1: the SEC or working educating the SEC. I should say,
Speaker 1: so it was a nice it was a nice surprise
Speaker 1: to get that year. UH. But you know, come back
Speaker 1: to the to some the questions you know, other influencers
Speaker 1: on the on the finance side, uh Gene Fama. Without
Speaker 1: a question, I admire David Boothford for taking this academic
Speaker 1: approach to investing and building this huge firm out of it.
Speaker 1: Dimensional Funds Advisors now a four billion dollars, right, that's
Speaker 1: a huge pile of money. And if you're an advisor
Speaker 1: and you're not working with Dimensional Funds Advisors, I'm like saying,
Speaker 1: why aren't you? You know, I look at the universe
Speaker 1: and say, we're Dimensionals at the top. Vanguard is number two.
Speaker 1: And then there's a huge follow off after that in
Speaker 1: terms of the way that the mutual funds, for example,
Speaker 1: or other investment products are designed engineer the whole run off, right,
Speaker 1: And and there are some specific products that are pretty good.
Speaker 1: But but in terms of the overall platform, and I know,
Speaker 1: I know it takes takes something to be able to
Speaker 1: access Dimensionals Funds, but you have to be an advisor.
Speaker 1: They make you go through a bunch of hoops to
Speaker 1: understand what dimensions mean, small cap value, etcetera. All the
Speaker 1: different factors. They really don't randomly take people and their crew.
Speaker 1: They're the advisors who work with Dimensional They are not
Speaker 1: active traders, meaning that even in the O eight oh
Speaker 1: nine collapse, these guys are sitting tight and saying, hey,
Speaker 1: we're never gonna be able to time this, so we're
Speaker 1: just gonna ride it out. And they had almost no
Speaker 1: they may even had to have had inflows during that period,
Speaker 1: So it's not for So would you say you don't
Speaker 1: understand why my office is a dimensional shop, But I
Speaker 1: could see why some people would look at his scans
Speaker 1: and say this isn't for me. Again, I've drank the
Speaker 1: kool aid, so I have no objectivity with this. But
Speaker 1: there are people who say, we want to pick stocks,
Speaker 1: or we want to try and time the market, or
Speaker 1: we want to have more flexibility, and if our clients
Speaker 1: want out, we're not going to tell them not to
Speaker 1: get out. I think one of the things I'm fond
Speaker 1: of saying is your clients don't know what they want,
Speaker 1: and it's your job to tell them what they need.
Speaker 1: They think they know what they want because they read
Speaker 1: a headline so many on TV said something, but that's
Speaker 1: just a momentary lapse of reason. What they need is
Speaker 1: to someone is for someone to say you may think
Speaker 1: you want this now, but let me explain what you needed,
Speaker 1: because what just happened in China last month has nothing
Speaker 1: to do with the thirty year plan you put together
Speaker 1: about your kids going to college and your retirement and
Speaker 1: a generational length transfer. This is a temporary thing, not
Speaker 1: part of your plan. They need someone to tell that,
Speaker 1: even though they want to hear whatever the craziness that
Speaker 1: happens to be on television that moment. You know, every
Speaker 1: investor needs to have this this plan investment policy that says,
Speaker 1: you know, we we don't know if the market is
Speaker 1: going to go up or down, but we know how
Speaker 1: we're going to react to it, and we know that
Speaker 1: we need to keep these four words in mind. And
Speaker 1: I used to hold client conferences. I was working in
Speaker 1: a firm, and you know, you do the luncheon, and
Speaker 1: you bring in thirty clients and you have a nice
Speaker 1: luncheon or dinner, and I would have all the clients
Speaker 1: stand up and repeat after me, very loudly. These four
Speaker 1: words become some solemonic wisdom, right, buy low, sell high.
Speaker 1: That's simple, okay. And they would be beating that to me.
Speaker 1: And and of course getting them to sell usually wasn't
Speaker 1: very difficult. Taking gains off the table. Of course, the
Speaker 1: downturn happens by low a little bit more difficult when
Speaker 1: they don't think the world is going to exist next week.
Speaker 1: To get them to buy when things are really low.
Speaker 1: If the world isn't gonna exist, so what so go
Speaker 1: buy stocks? What do you care if we're all gone
Speaker 1: in a week? What does it matter? So at the
Speaker 1: time the firm, I was with UH, and when I
Speaker 1: went to teaching, I sold my interest in the firm
Speaker 1: to my partners. UH. We had a hundred and thirty clients,
Speaker 1: a hundred and twenty seven of them. Did what we
Speaker 1: asked was the market was going down, we bought and
Speaker 1: went down further. We bought on March nine, just by
Speaker 1: fortunate luck, we bought again, you know, and and the
Speaker 1: clients reaped the benefits of that. UH and a lot
Speaker 1: of a lot of the financial behavior side of this,
Speaker 1: And it doesn't matter if you're a roaber advisor or
Speaker 1: if you're hands on have a deep relationship with a
Speaker 1: few clients. Is preparing clients for what's going to happen
Speaker 1: and in advance and getting them to remember that they
Speaker 1: committed to following this plan regardless of what happens. Look
Speaker 1: you said, markets go up, markets go down, well pretty
Speaker 1: much all the time. That's what's gonna happen. Markets will
Speaker 1: go up and down. Are you emotionally ready to ride that? Right?
Speaker 1: You know, we had clients who who were going to
Speaker 1: cancel their vacation trips. Uh, you know, seven years old,
Speaker 1: gonna go on a cruise down the river in Europe,
Speaker 1: and in our response to them is absolutely not okay, No,
Speaker 1: we We've looked at your portfolio. You can still do this,
Speaker 1: your retirement still secure. Go do this, Go enjoy yourself.
Speaker 1: The market will be here when you get back. And
Speaker 1: and that's delivering value to a client is when you
Speaker 1: can do that. You know. One of the questions I
Speaker 1: did not ask you earlier, but let's let's bring it
Speaker 1: up here. You mentioned a hundred and seven out of
Speaker 1: a hundred and how often should an advisor fire a client?
Speaker 1: Meaning how often is there a bad fit? Where I'm
Speaker 1: gonna I'm gonna phrase it differently, how often is it
Speaker 1: in everybody's interest to say, hey, listen, we do acts
Speaker 1: you want, why let's part as friends and go our
Speaker 1: separate ways. I think screening clients to make sure that
Speaker 1: they fit with you, fit with your firends philosophy, but
Speaker 1: also fit with your personality. There there are clients that
Speaker 1: came to our firm that I wasn't a very good
Speaker 1: fit with personality wise, but one of my partners was
Speaker 1: a good fit with them. And I think that the
Speaker 1: idea of having a firm that you have shared client
Speaker 1: relationships with is a tremendous opportunity to secure more clients.
Speaker 1: But there they are probably the people out there who
Speaker 1: who will never embrace the investment philosophy that you might
Speaker 1: be using or the manner in which you serve clients.
Speaker 1: And you have just got to be honest and say
Speaker 1: we think you might be served at elsewhere. And if
Speaker 1: you take on those clients, if you if you're screening process,
Speaker 1: you know, I like to say, clients, will any of
Speaker 1: you us? We interview them absolutely. And if if you
Speaker 1: take on those clients and it turns out to be
Speaker 1: a mistake, then fix that mistake right away. It's people
Speaker 1: don't realize to say, okay, we're not gonna be your
Speaker 1: adviser anymore. That's time consuming, it's a headache, it's a disruptive.
Speaker 1: You have to file a certain thing every time a
Speaker 1: client leaves you have to have a note in a file.
Speaker 1: Here's why this relationship terminated, here's where the money met went.
Speaker 1: So there's no money laundering issues, there's a whole bunch
Speaker 1: of regulations. You're you're much better off screening that issue
Speaker 1: out beforehands, rather than saying, well, we'll just bring them
Speaker 1: in and they'll fire us in two or three quarters.
Speaker 1: But in the meanwhile, we've collected the fees. It's not
Speaker 1: worth it to do that. It takes time to too.
Speaker 1: It takes a huge amount of paperwork, time and also
Speaker 1: educating the client and training the client in that first year.
Speaker 1: And you simply don't make that investment with a client
Speaker 1: unless you're really really confident that that's going to be
Speaker 1: good fit for you. I mentioned the email that wasn't
Speaker 1: made up, that was a real email. Hey, I have
Speaker 1: X number of millions of dollars. I want to spread
Speaker 1: this money around five people, and whoever does the best
Speaker 1: gets all the money. And I wrote this guy, Hey,
Speaker 1: you're clearly a bad fit for us, but I have
Speaker 1: to tell you what you're setting up is a disaster.
Speaker 1: And here's why. Think about how you've just incentivized not me,
Speaker 1: because I would never do that. How you've incentivized these
Speaker 1: five managers. First, the odds are five to one against
Speaker 1: any of them winning, So you've now created this huge
Speaker 1: incentive for them to be reckless with your money in
Speaker 1: hopes of winning the big account. You've created a lose
Speaker 1: lose situation for these guys aren't going to get the account,
Speaker 1: so they're gonna do god knows what. And the fifth,
Speaker 1: if he wins the account, it's gonna be because he
Speaker 1: got lucky doing really risky things to show you the
Speaker 1: best performance. Why would you do this? And it was
Speaker 1: to me, it's so obvious. That's a person said, well,
Speaker 1: you don't want to compete, so obviously, and we get
Speaker 1: I get emails all the time. What's your sharp ratio?
Speaker 1: My sharp ratio is see you later, that's my sharp ratio.
Speaker 1: You know, economic incentives matter, and they manner a huge
Speaker 1: amount in financial services. And if you're a fiduciary, you
Speaker 1: have got to set yourself up that you're not driven
Speaker 1: by these incentives to do something bad for a client.
Speaker 1: And that remans removing conflicts, because if you have a
Speaker 1: conflict of interest that is going to infect your judgment.
Speaker 1: Maybe unconsciously, you're going to somehow over time, self justify
Speaker 1: doing something bad to a client if you have an
Speaker 1: economic incentive to do it. And and that's the purpose
Speaker 1: of the fiduciary standard is to remove those economic incentives
Speaker 1: to still be paid as an expert, as a professional.
Speaker 1: You you deserve professional level compensation, no question about it, right,
Speaker 1: but to remove the economic incentives that really would cause
Speaker 1: you to do things that would harm the client and
Speaker 1: to put you on the same side of the table
Speaker 1: absolute client. Um, let's keep plowing through my last few
Speaker 1: questions while I while I have you, how about some books?
Speaker 1: What are your favorite books, either on investing or non
Speaker 1: fiction or anything else that you think is worth sharing. Uh? Well,
Speaker 1: I've always been a Tom Clancy fan on the side,
Speaker 1: you know, I'm what's your favorite Clancy some of all years?
Speaker 1: Is how I found him? Uh? I would say Cardinal
Speaker 1: to Kremlin probably the first one I read, so you
Speaker 1: know that remains one of my favorites. Uh. The Hunt
Speaker 1: for Red October was a good one, no doubt about
Speaker 1: that was great without a great On the nonfiction side, uh,
Speaker 1: the investment side of you know, I like authors like
Speaker 1: Peter Bernstein, of course, So let's back up, is that
Speaker 1: Peter Bernstein. When I was on vacation last month, I
Speaker 1: brought with me Against the Gods and sitting on my
Speaker 1: desk at home on top of Against the Gods as
Speaker 1: good as gold, amazing. Yeah, great books. You know, I
Speaker 1: go back and reread uh those books. Uh. And Larry
Speaker 1: swad Rows stuff. He sends to come out with about
Speaker 1: a book a year or so. Swedrow is another scorched
Speaker 1: just nothing gets him. And he was on the show.
Speaker 1: He was great. You meet him. He looks like such
Speaker 1: a quiet guy and then he starts speaking and there
Speaker 1: are no lots of colladal damage, no survivors. He just
Speaker 1: mows everything down in front of him. What what book
Speaker 1: of his is on your recommended list? I guess for
Speaker 1: for beginning investor? Uh, I like what Wall Street doesn't
Speaker 1: want you to know. I think it's like his first
Speaker 1: or second book. You know, I actually have my had
Speaker 1: my students read uh The Incredible Shrinking Alpha. Last semester.
Speaker 1: He has been on a tear about hedge funds private equity.
Speaker 1: He just recently and I'll see if I find the
Speaker 1: link did something that basically says sixty performs private equity.
Speaker 1: Just he's just been achen but but if I had
Speaker 1: to say two books that are to be if you
Speaker 1: had only two books on your bookshelf, one of them
Speaker 1: are to be Roger Gibson's Ascid Allocation Roger Gibson's Asset Allocation,
Speaker 1: fifth Edition. Now that's a that's a pretty thick tone,
Speaker 1: isn't it pretty thick book? You know. It's that's on
Speaker 1: my that's right over my desk in the office, right,
Speaker 1: it's it's like Rick Ferry on stboards. Okay, it's uh
Speaker 1: so you take Rick Ferry's Acid Allocation Book, which is
Speaker 1: another very accessible and very readable. I use that on
Speaker 1: undergraduate you know, and Roger Gibson's more of a graduate
Speaker 1: level professional type view of that. But the other one
Speaker 1: is a book that's almost a hundred years old. Now
Speaker 1: it's you can find it on the web for free.
Speaker 1: It's a George Clayian's The Richest Man in Babylon. Oh sure,
Speaker 1: I read that a little time ago. You know you
Speaker 1: ought to reread it. Really, you ought to reread it
Speaker 1: about once every five years. I do that with Mark
Speaker 1: Market Wizards by Jack Schweger. I reread that every five
Speaker 1: or seven years. So the Richest Man in Babylon is
Speaker 1: a parable, Yes, a series of parables supposedly true from
Speaker 1: from the days of Mesopotamian what have you, and tell
Speaker 1: us that there are by the way, there are a
Speaker 1: few books like that, um, that are essentially parables. But
Speaker 1: tell us about the richest man in Babylon. Seven major themes,
Speaker 1: and I'll just go into two of them. One is
Speaker 1: investing yourself, but the but the other one is probably
Speaker 1: the best illustration of how to do this. The best
Speaker 1: explanation is live below your means that the parables that
Speaker 1: are surround that, and they're actually two or three on
Speaker 1: that theme, are are fantastic. And I will buy that
Speaker 1: book and give it to clients or the sons and
Speaker 1: daughters are clients, especially those who are getting ready to
Speaker 1: graduate from college, and and say you really need to
Speaker 1: read this, and hopefully they do and and some do
Speaker 1: and they gain knowledge from it. It's also pretty interesting
Speaker 1: wedding gift, by the way, that's fascinating. UM. So we
Speaker 1: talked about all the things that changed in the industry,
Speaker 1: UM since since you joined the join the industry. Anything
Speaker 1: else you want to reference as to what might be
Speaker 1: the next major shifts or recent changes of note, or
Speaker 1: have we beaten that horse. Well, you know, I think
Speaker 1: going forward, it's fairly predictable that as the fiduciary standard
Speaker 1: comes into play, high cost variable nuities are going into sphere.
Speaker 1: Equity index annuities, I love the concept of them as
Speaker 1: a fixed income alternative. I think they're marketing incorrectly. The
Speaker 1: cost structure is not transparent at all. The the control
Speaker 1: of the insurance company has over it is not correct.
Speaker 1: Isn't that true with all insurance products? The cost structure
Speaker 1: is not transparent, uh, to a large degree. You know,
Speaker 1: variable life variable nuities, the call structure is more transparent
Speaker 1: than whole life universal life equity index and duties. There's
Speaker 1: really no transparency. It's a great concept, that the implementation
Speaker 1: of it has been poor, and it makes it tough,
Speaker 1: really tough for a fiduciary to recommend an equity index
Speaker 1: and nuity Right now, I haven't found one that that
Speaker 1: I'm uncomfortable recommending. Immediate and nuties they are to be
Speaker 1: used a lot more often. What sort of a nuties?
Speaker 1: Immediate fixed income annuities? Okay, so retirees should probably take
Speaker 1: a portion of their wealth and annuities. It maybe not
Speaker 1: all in one chunk. Maybe over times early retirees with
Speaker 1: an inflation writer. Uh So, this way they know they
Speaker 1: have a guaranteed income no matter what happens in the market,
Speaker 1: and the real risk at that point becomes inflation, not
Speaker 1: running out of money exactly. We move that, you know.
Speaker 1: And I'm a little suspect about the whole concept of
Speaker 1: longevity and nuities. I think that it's a great concept.
Speaker 1: You can pick up them mortality credits and it does
Speaker 1: assuage the fear of that, But I think you're giving
Speaker 1: up a lot and and a lot more research I
Speaker 1: think is needed in that area as to whether or
Speaker 1: not that is really fits very well with the rest
Speaker 1: of her portfolio. Well, what we It's funny there was
Speaker 1: an article in Barrens about this. In our fixed income portfolio,
Speaker 1: we're in the midst of trend, so every year we
Speaker 1: do a big look see and say what do we
Speaker 1: wanna keep, what what's better, what's and usually we don't
Speaker 1: do a whole lot of anything. But over the past year,
Speaker 1: the bond dated ETFs have come out and there was
Speaker 1: just an article in Barrens. And we started doing looking
Speaker 1: at this a while ago, where you could create a
Speaker 1: laddered fixed income portfolio using low qust ETFs. So if
Speaker 1: someone's concerned about what one of them if rates rise, well,
Speaker 1: look when the O sixteen ends, you take that cash
Speaker 1: and you buy the O nineteen, and when the O seventeen.
Speaker 1: And that's the sort of technology, that's a sort of
Speaker 1: product which is a dirty word on Wall Street. You
Speaker 1: could not do that two years ago. It didn't really exist. Yeah,
Speaker 1: you could have, you know, target date funds in a
Speaker 1: four oh one K, but you couldn't say I want
Speaker 1: to take X amount of my fixed income portfolio and
Speaker 1: have it constantly be rolling. It's really a fascinating innovation
Speaker 1: that I think a lot of people don't understand. If
Speaker 1: you can remove interstate risk or at least manage it
Speaker 1: substantially in this type of environment, with this laddered approach
Speaker 1: that you're talking about, that is probably the best fixed
Speaker 1: income strategy for the next decade. It's quite fascinating. If
Speaker 1: it was. If you go a little longer, it would
Speaker 1: be great. But I think right now you could go
Speaker 1: out three or four years using ice shares. I don't
Speaker 1: know if you go out much further um, But it
Speaker 1: really another one of those issues that the technology just
Speaker 1: didn't the products didn't exist a few years ago. Um.
Speaker 1: Next question, So we talked about major shifts. Let's let's
Speaker 1: talk about my favorite two questions, my last two questions.
Speaker 1: So you work with a lot of students, You work
Speaker 1: with a lot of millennials, and and I don't know
Speaker 1: what we're calling the generation after millennials, if if they've
Speaker 1: renamed them yet. What advice would you give to somebody
Speaker 1: graduating school this year who was interested in looking into
Speaker 1: a career in finance. Find a firm that's going to
Speaker 1: invest in you. Uh, you don't say I'm gonna go
Speaker 1: hit the ground running and be able to do everything
Speaker 1: that I have full blown financial advisor needs. Really think
Speaker 1: about the first year, the first perhaps the second year
Speaker 1: as a residency process. Work extremely hard, get your certified
Speaker 1: financial planner certification done in that first year. Uh, probably
Speaker 1: by the end of the first year, in addition to
Speaker 1: whatever licenses that you need. Uh. Work hard. To think
Speaker 1: about it as a medical residency, working not perhaps that hard,
Speaker 1: but but hard, and learn all that you can, absorb
Speaker 1: whatever you can. Once you have that couple of years
Speaker 1: of experience in this industry and you've invested in yourself,
Speaker 1: that way, you can write your own ticket and and
Speaker 1: hopefully you'll stay with the firm that you join and
Speaker 1: they will have a career path for you, and you
Speaker 1: see your future with that firm. You enjoy that firm.
Speaker 1: But if if that doesn't work out, and you have
Speaker 1: invested in yourself and the firm is invested in you,
Speaker 1: then you will You are a very marketable person right
Speaker 1: now in terms of the demand for experience financial planets
Speaker 1: right now. And my final question, what is it that
Speaker 1: you know about investing today that you wish you knew
Speaker 1: twenty years ago when you when you began. One thing uncertainty, Uh,
Speaker 1: it is prevalent. It is with us, it will always
Speaker 1: be with us. I'm amazed at how many financial planning
Speaker 1: programs are set up to say, or we design the
Speaker 1: portfolio so that you can retire by the time you're
Speaker 1: fifty eight. Right, Well, guess what you know. There's a
Speaker 1: lot of uncertainty about the future returns. I think innovation
Speaker 1: is going to be great in the United States as
Speaker 1: long as we fuel it with a lot of capital.
Speaker 1: We apply for diucry standard. We removed this this rent
Speaker 1: extraction that Wall Street does over time, that's going to
Speaker 1: lead to greater capital accumulation in the United States and
Speaker 1: help propel our economy forward. Uh So, I'm very optimistic
Speaker 1: about the U. S economy compared to I guess most
Speaker 1: of my fellow colleagues over the next decade, over the
Speaker 1: next two three decades. But this whole concept that there's
Speaker 1: a lot of uncertainty out there still, and we shouldn't
Speaker 1: be telling clients you're gonna retire. We ought to be
Speaker 1: telling clients, I can help you retire early. I don't
Speaker 1: know when that will be, but I know that if
Speaker 1: you followed my advice over the long term, if you
Speaker 1: stick with this discipline process that we're going to implement,
Speaker 1: did I know that you will be able to achieve
Speaker 1: whatever your lifetime goals are, faster and better. And and
Speaker 1: that's the type of promise that we ought to be
Speaker 1: telling our clients, not giving them such a hard line.
Speaker 1: This is when you're gonna accomplish something. Ron. This has
Speaker 1: been great. Thank you so much for being so generous
Speaker 1: with your time. If people want to find more of
Speaker 1: your writings, where would they go? Uh my blog scholar
Speaker 1: FP dot blog spot dot com and on Twitter. You
Speaker 1: are one four zero LTD. I don't know where you
Speaker 1: came up with that limited characters. I want to thank um,
Speaker 1: my head of research, Mike bat Nick, and my producer
Speaker 1: Charlie Volmer for help putting this together. Be sure and
Speaker 1: look Up an Inch or Down an Inch on iTunes
Speaker 1: to see the other seventy five or so podcast we've done.
Speaker 1: I'm Barry Ridhults. You've been listening to Masters in Business
Speaker 1: on Bloomberg Radio