WEBVTT - Interview With Robert Johnson: Masters in Business (Audio) 0:00:03.240 --> 0:00:07.560 This is Masters in Business with Barry Ridholds on Bloomberg Radio. 0:00:08.119 --> 0:00:10.879 This week on Masters in Business, I have a special guest. 0:00:11.119 --> 0:00:14.880 His name is Dr Robert Johnson. He is currently the 0:00:14.920 --> 0:00:19.040 President of the American College of Finance. In his previous job, 0:00:19.160 --> 0:00:22.880 he was a senior person at the cf A Institute, 0:00:23.000 --> 0:00:26.320 where he pretty much was in charge of the Chartered 0:00:26.360 --> 0:00:31.200 Financial Analyst Test. You can only take one part per year, 0:00:31.800 --> 0:00:33.880 pass part one, and you have to wait a year 0:00:33.920 --> 0:00:37.080 to pass part two, and then ultimately take the third 0:00:37.120 --> 0:00:40.560 part in the third year. It has about a fifty 0:00:41.000 --> 0:00:43.680 fail rate and a lot of people look at it 0:00:43.800 --> 0:00:50.000 as a um really a most challenging exam they'll ever 0:00:50.120 --> 0:00:54.560 encounter in their career in finance. We discuss all sorts 0:00:54.600 --> 0:00:59.400 of things, everything from the value of value investing to 0:00:59.800 --> 0:01:04.319 the impact of the FED on the investment process. UH, 0:01:04.360 --> 0:01:09.520 if you are at all interested in how people become 0:01:10.000 --> 0:01:13.600 certified to actually be c f A s and what 0:01:13.800 --> 0:01:17.520 the value of those those letters are to either a 0:01:17.560 --> 0:01:21.080 company or an investment bank or or an analyst, I 0:01:21.120 --> 0:01:26.040 think you'll find this conversation quite interesting. Bob is really 0:01:26.040 --> 0:01:28.800 an interesting guy to talk to. He's very knowledgeable about 0:01:28.800 --> 0:01:32.800 a lot of areas tells some great stories about Warren Buffett. 0:01:33.880 --> 0:01:37.040 One of the books he wrote, which is called Strategic 0:01:37.120 --> 0:01:41.200 Value Investing, is on Buffets reading list. Every year at 0:01:41.200 --> 0:01:45.800 Berkshire Hathaway's annual fest they have a list of suggested books. 0:01:45.840 --> 0:01:49.200 His book has been on that list for quite some time. Anyway, 0:01:49.240 --> 0:01:53.040 I found him to be just a genuine, fascinating, interesting guy, 0:01:53.080 --> 0:01:56.240 and I think you'll enjoy the conversation. So, with no 0:01:56.360 --> 0:02:03.720 further ado, my conversation with Dr Robert Johnson. This is 0:02:03.840 --> 0:02:08.280 Masters in Business with Barry Ridholts on Bloomberg Radio. My 0:02:08.400 --> 0:02:11.840 special guest this week is Dr Robert Johnson. Let me 0:02:11.880 --> 0:02:14.720 just give you the short version of his curriculum VITA. 0:02:15.200 --> 0:02:19.560 He is currently President and CEO at the American College 0:02:19.560 --> 0:02:22.960 of Financial Services UH. He has been the recipient of 0:02:23.000 --> 0:02:26.560 the Alfred C. Morley Distinguished Service Award when he was 0:02:26.600 --> 0:02:29.640 one of the senior folks at the c f A Institute. 0:02:29.639 --> 0:02:34.120 He has won the RFK Memorial Student Award for teaching achievement. 0:02:34.680 --> 0:02:40.040 Serves on the editorial board of the Journal of Portfolio Management. 0:02:40.080 --> 0:02:44.360 He really helped to develop and refine the Chartered Financial 0:02:44.400 --> 0:02:47.040 Analyst test. Will get to that later. Today. He is 0:02:47.080 --> 0:02:50.880 the author of numerous books, including Invest with the FED, 0:02:51.440 --> 0:02:56.600 Strategic Value Investing, and Tools and Techniques of Investment Planning. 0:02:57.280 --> 0:03:00.120 Dr Robert Johnson, Welcome to Bloomberg. Thank you very It's 0:03:00.200 --> 0:03:02.760 terrific to be here. I'm thrilled to have you. We 0:03:02.880 --> 0:03:07.000 met previously on Tom Keene Show, and I found it fascinating. 0:03:07.600 --> 0:03:11.160 What are unique niche in the world of finance that 0:03:11.280 --> 0:03:14.240 you occupy sort of one foot in the world of 0:03:14.240 --> 0:03:18.639 academia and one foot in the world of actually helping 0:03:19.480 --> 0:03:22.919 um people become chartered financial analysts. So so let's talk 0:03:22.919 --> 0:03:26.520 a little bit about your background. When people when you 0:03:26.560 --> 0:03:28.440 first meet people and they say, hey, Bob, what do 0:03:28.440 --> 0:03:31.480 you do for a living? How do you answer that question, Barry, 0:03:31.520 --> 0:03:35.160 I tell him I'm a pracademic. A pracademic, and that's 0:03:35.200 --> 0:03:38.720 the word that I hope sometime comes into lexicon, the 0:03:38.760 --> 0:03:42.240 popular lexicon. I hope it's in Wikipedia someday, maybe even 0:03:42.240 --> 0:03:46.680 in Websters. But basically, a procademic is somebody who operates 0:03:46.800 --> 0:03:50.120 both in the world of the practitioner and in the 0:03:50.120 --> 0:03:55.080 world of academia. And unfortunately, I don't think that those 0:03:55.600 --> 0:03:57.920 circles if you look at it in a Van Diagram 0:03:57.960 --> 0:04:01.480 sense intersect very often, and I think that if we 0:04:01.560 --> 0:04:04.760 had more of that, I think both worlds would benefit. 0:04:05.400 --> 0:04:09.160 So that's that's fascinating. One of the questions I wanted 0:04:09.240 --> 0:04:12.360 to ask you was you've sort of gone back and 0:04:12.440 --> 0:04:17.320 forth between being a practitioner and being an academic. How 0:04:17.320 --> 0:04:21.159 does one make that transition in either direction? How do 0:04:21.160 --> 0:04:25.080 you go from a practitioner to an academic and vice versa. Well, 0:04:25.120 --> 0:04:27.159 I think if you stay close to the edge of 0:04:27.160 --> 0:04:29.560 each that it isn't much of a transition. When I 0:04:29.600 --> 0:04:33.800 was a finance professor at Creighton University, I also ran 0:04:33.839 --> 0:04:36.760 a money management firm. I had about fifty million dollars 0:04:36.800 --> 0:04:40.120 under management of private wealth, and I was a much 0:04:40.200 --> 0:04:44.520 better teacher because I was actually managing money. And I 0:04:44.560 --> 0:04:48.440 think the same is true in reverse. I think that 0:04:48.520 --> 0:04:52.800 folks who practice, if they look at the best in academia, 0:04:53.000 --> 0:04:56.800 can benefit greatly. So I I really don't think it's 0:04:56.800 --> 0:04:58.840 a tough transition if you if you kind of stay 0:04:58.839 --> 0:05:01.960 close to the edge. Fortunately, I think people want to 0:05:02.000 --> 0:05:04.320 operate in the center of those circles instead of where 0:05:04.360 --> 0:05:07.560 they overlap. You know, we use so much academic research 0:05:07.720 --> 0:05:11.200 in our regular practice. Whether it's the behavioral side as 0:05:11.240 --> 0:05:17.279 to how people misbehave, or just classic UM portfolio management theory. 0:05:17.360 --> 0:05:19.799 There's a lot of things to be learned from people 0:05:19.800 --> 0:05:23.080 who are spending lots of time just doing deep thought. 0:05:23.760 --> 0:05:27.440 You mentioned you were running a relatively small asset management business, 0:05:27.800 --> 0:05:31.160 but you've also been an outside director on some fairly 0:05:31.360 --> 0:05:38.040 substantial UM multibillion dollar management firms. What does the academic 0:05:38.120 --> 0:05:41.400 bring to a twenty plus billion dollar funds and how 0:05:41.440 --> 0:05:44.520 does that help you? How does being on a huge 0:05:45.480 --> 0:05:49.800 twenty billion dollar funds board help you as an educator? Well, 0:05:49.839 --> 0:05:53.279 I think it's discipline and rigor that that the academic 0:05:53.320 --> 0:05:57.040 can bring to the to the asset manager, and I 0:05:57.080 --> 0:06:00.680 think it's the best of academic research. Or instance, one 0:06:00.720 --> 0:06:03.560 of the things we looked at when I was was 0:06:03.640 --> 0:06:08.280 on the funds board that I was on was executive compensation. Well, 0:06:08.320 --> 0:06:11.680 I happen to have done my dissertation and executive compensation, 0:06:12.400 --> 0:06:17.400 and basically what my research showed was that incentive stock 0:06:17.440 --> 0:06:21.200 options change the way people worked. So I think when 0:06:21.200 --> 0:06:25.800 you bring some empirical evidence to the table that it 0:06:26.160 --> 0:06:29.440 no longer is just anecdotal that I think it really 0:06:29.480 --> 0:06:32.280 brings it to light and people can see that their 0:06:32.400 --> 0:06:35.240 substantive research behind a lot of the findings, So not 0:06:35.360 --> 0:06:38.880 just a story, but actual data that that underlines it. Look, 0:06:39.040 --> 0:06:40.640 as long as you brought it up, let's talk a 0:06:40.640 --> 0:06:46.320 little bit about executive compensation. My concern about stock options 0:06:46.360 --> 0:06:49.120 are that you're paying people for based how well the 0:06:49.200 --> 0:06:52.719 stock market does, as opposed to how much they've improved 0:06:52.720 --> 0:06:56.640 the underlying company. True of false, true the delta. What 0:06:56.640 --> 0:06:58.800 what you really would like to measure is the delta 0:06:58.839 --> 0:07:03.039 how much how how much that particular executive change the 0:07:03.080 --> 0:07:06.120 way that company operated, And too often they're just paid 0:07:06.200 --> 0:07:10.800 for a tailwind. The market goes up, the sector goes up, 0:07:10.840 --> 0:07:13.520 and your company within that sector is going to participate 0:07:13.560 --> 0:07:16.640 in both of those, whether you're great or terrible, there's 0:07:16.640 --> 0:07:19.040 going to be some overlap there exactly, and there's no 0:07:19.200 --> 0:07:24.120 pure element. It's it's it's so difficult to disentangle the effects. 0:07:24.160 --> 0:07:26.880 So let's talk about another rising tide. And in the 0:07:26.960 --> 0:07:28.840 last minute and a half we have in the segment 0:07:29.440 --> 0:07:33.960 you wrote the role of monetary policy and investment management. 0:07:34.640 --> 0:07:38.840 Uh said differently, I was always taught don't fight the Fed. 0:07:39.160 --> 0:07:43.480 What is the proper role of monetary policy? In investment management. 0:07:43.640 --> 0:07:46.000 The curious thing is that when you say don't fight 0:07:46.080 --> 0:07:49.560 the FED. Um. When I started that line of research, 0:07:49.960 --> 0:07:52.600 I was an asset manager and I noticed and this 0:07:52.640 --> 0:07:55.000 is in the late eighties. So remember in the late eighties, 0:07:56.000 --> 0:07:59.600 the people in the industry didn't know who the chairman 0:07:59.640 --> 0:08:01.920 of the FED to reserve it was. People didn't know 0:08:02.440 --> 0:08:05.000 people didn't know what the FED was. Now it's front 0:08:05.000 --> 0:08:07.040 page news. So if you put yourself back in there, 0:08:07.080 --> 0:08:11.760 I noticed that when the FED changed policy, it influenced 0:08:11.800 --> 0:08:15.600 asset prices, and so I wanted to rigorously study that 0:08:15.720 --> 0:08:18.760 and empirically study that lo and behold. I started these 0:08:18.760 --> 0:08:22.720 studies in the early nineties, and the culmination actually was 0:08:22.840 --> 0:08:25.360 the book invest with the FED that was recently just 0:08:25.440 --> 0:08:28.040 published by McGraw hill. We're gonna get to that in 0:08:28.040 --> 0:08:30.240 a little while. That's on my list of things to 0:08:30.320 --> 0:08:33.680 chat about. I'm Barry rid Helts. You're listening to Masters 0:08:33.679 --> 0:08:37.000 in Business on Bloomberg Radio. My special guest this week 0:08:37.400 --> 0:08:40.560 is Dr Robert Johnson. He is the president of the 0:08:40.600 --> 0:08:45.440 American College of Financial Services. Before that, he was a 0:08:45.559 --> 0:08:49.160 very senior person at the CIFA Institute, where he had 0:08:49.200 --> 0:08:53.880 a lot to do with the Chartered Financial Analyst Test 0:08:54.480 --> 0:08:57.520 the CIFA exam Levels one, two, and three as it's 0:08:57.559 --> 0:09:00.160 known and hated. Let's talk a little bit about the 0:09:00.200 --> 0:09:04.280 institute first. What exactly is the c f A Institute 0:09:04.480 --> 0:09:07.520 c fan Stude is basically two things. The cf an 0:09:07.559 --> 0:09:11.959 Stude is the organization that rights and administers the c 0:09:12.160 --> 0:09:15.800 f A exams, and cfn Stute is also a membership organization. 0:09:16.000 --> 0:09:19.160 To maintain the c f A charter, one needs to 0:09:19.480 --> 0:09:21.960 be a member of cf A Institute, so it's a 0:09:21.960 --> 0:09:25.800 membership organization. I believe the numbers now are probably about 0:09:25.800 --> 0:09:29.360 a hundred fifty thousand people, So there's a hundred fifty 0:09:29.360 --> 0:09:31.920 thousand cf A s out there in the world. You 0:09:31.960 --> 0:09:34.720 can be a member of cf A Institute without being 0:09:34.760 --> 0:09:37.839 a c f A. Very few are the lion share 0:09:37.880 --> 0:09:40.360 of people are c f A charter holders, are cf 0:09:40.440 --> 0:09:43.520 A candidates, some cf A candidates members safe to say 0:09:43.559 --> 0:09:46.360 a hundred thousand people have gone through all three exams, 0:09:46.360 --> 0:09:48.640 past all three exams, well, I think I think it's 0:09:48.640 --> 0:09:51.880 probably more than that because the exam started in sixty three, 0:09:51.920 --> 0:09:54.280 so some of those folks have died, so I think 0:09:54.320 --> 0:09:58.800 that you've probably got over somewhere between a hundred and 0:09:58.920 --> 0:10:02.800 probably i'd a quarter and UM, what were your what 0:10:02.880 --> 0:10:05.120 was your role at the cf A Institute. You've had 0:10:05.160 --> 0:10:08.120 a number of positions within the institute. It's funny, Barry, 0:10:08.240 --> 0:10:11.800 I Uh, I'm laughing because I was at Creighton University. 0:10:11.880 --> 0:10:15.080 I was a tenured full professor of finance, last of 0:10:15.120 --> 0:10:19.440 the landed gentry in America, and c f A Institute 0:10:19.480 --> 0:10:22.360 came calling and said that they would like me to 0:10:22.400 --> 0:10:25.560 come and work on the curriculum. So I took a 0:10:25.640 --> 0:10:29.719 two year leave of absence in n and I was 0:10:29.800 --> 0:10:35.400 hired to UH to run the curriculum development process UM too. 0:10:35.760 --> 0:10:40.520 About almost two years into the process, I was promoted 0:10:40.559 --> 0:10:42.839 to being head of the c f A program, the 0:10:44.280 --> 0:10:48.440 whole thing, the curriculum, exams, administering the exams, standard setting 0:10:48.440 --> 0:10:53.000 the exams, the whole thing. So I resigned tenure at 0:10:53.120 --> 0:10:57.560 cf at Creighton University and stayed on at cf A Institute. 0:10:57.960 --> 0:11:00.920 A few years later UM, I would promoted to being 0:11:01.000 --> 0:11:04.880 in charge of all educational products they do. Cf A 0:11:04.960 --> 0:11:08.599 does some other educational They have the Certificate Investment Performance 0:11:08.640 --> 0:11:13.320 Measurement UM. They run the Financial Analyst Journal UM. A 0:11:13.360 --> 0:11:16.520 lot of professional publications, conferences and so forth. So I 0:11:16.679 --> 0:11:19.839 was in charge of all of those UM. Later on 0:11:19.960 --> 0:11:24.000 I was promoted to being Deputy CEO UM basically second 0:11:24.040 --> 0:11:27.760 in command at CFA Institute and manage the lions share 0:11:27.760 --> 0:11:30.800 of the organization reported up through to me at that time. 0:11:31.720 --> 0:11:34.959 So uh and I ended up leaving in two thousand eleven. 0:11:35.040 --> 0:11:40.520 So I was there fifteen years. Your your bio says 0:11:40.600 --> 0:11:47.040 that you have quote extensive experience with the credentialing programs UNE. 0:11:47.320 --> 0:11:50.880 Now in English, what exactly does that mean. Well, there's 0:11:50.880 --> 0:11:55.120 a profession that's known as psychometrics, and these are people 0:11:55.160 --> 0:11:58.840 who have PhDs in measurement and testing. This is the 0:11:58.920 --> 0:12:02.720 science of test ng and the science of determining who 0:12:02.760 --> 0:12:06.719 has indeed passed an examination. So what I did when 0:12:06.760 --> 0:12:09.439 I was at cf Institute was I knew we were 0:12:09.480 --> 0:12:12.440 good at finance, and we were good at investments, but 0:12:12.520 --> 0:12:15.520 I was convinced we really weren't very good at developing 0:12:15.600 --> 0:12:19.760 curriculum that was great for the distance learner. And I 0:12:19.840 --> 0:12:22.760 certainly didn't think we knew how to write exam questions 0:12:22.800 --> 0:12:26.120 like someone who studied that for a living did. So 0:12:26.200 --> 0:12:31.120 I brought psychometricians into the process and Basically what I 0:12:31.960 --> 0:12:35.559 what I believe happened is we professionalize the process of 0:12:35.600 --> 0:12:39.080 writing the exams, developing the curriculum and so forth. I 0:12:39.160 --> 0:12:43.160 love that expression, the distance learner, the person who's not 0:12:43.200 --> 0:12:48.000 just memorizing something temporarily but learning it for the long haul. Well, 0:12:48.080 --> 0:12:49.880 and the other thing Barry with the c f A 0:12:49.960 --> 0:12:52.719 program was the lion's share of the candidates now or 0:12:52.800 --> 0:12:55.680 from outside of North America, many for many of whom 0:12:55.720 --> 0:12:58.640 English is a second language. So you have to take 0:12:58.720 --> 0:13:02.080 that into account when fighting the curricular materials and writing 0:13:02.120 --> 0:13:05.760 the exams. And that's a big factor. Now, um, you know, 0:13:06.080 --> 0:13:11.080 just interest, just nomenclature and and just common terminology, no shorthand, 0:13:11.160 --> 0:13:15.200 no colloquialisms. It has to be the queen's tongue so 0:13:15.240 --> 0:13:17.400 to speak right. You have to think about the person 0:13:17.480 --> 0:13:21.720 in in Thailand or in Cambodia or in uh in 0:13:21.880 --> 0:13:28.360 Kenya who's studying this, who it isn't familiar with colloquial English. Huh, 0:13:28.440 --> 0:13:32.160 that's that's really never thought about that before. That's quite interesting. 0:13:32.679 --> 0:13:36.120 So the cf A exam has a reputation for being 0:13:36.480 --> 0:13:40.880 a killer, especially um. Two of the levels are known 0:13:40.920 --> 0:13:44.839 as being notoriously hard. The fail rate is fairly high. 0:13:44.920 --> 0:13:47.839 What what is the fail rate on the each cf 0:13:47.880 --> 0:13:51.160 A level? Gosh? Now, I believe the fail rate on 0:13:51.280 --> 0:13:55.240 level one is about six the fail rate more than half? Right, 0:13:55.280 --> 0:13:57.839 The fail rate on level two is I believe it 0:13:58.040 --> 0:14:00.959 more than half, but still more than half. Failure rate 0:14:01.000 --> 0:14:04.480 on level three is less than just you know, you 0:14:04.480 --> 0:14:06.840 don't even have to study now the entrance walk right 0:14:06.880 --> 0:14:09.360 through that. It's only like a forty eight percent fail rate? 0:14:09.800 --> 0:14:12.880 Are you could cram in like an hour? Barry every year. 0:14:13.040 --> 0:14:15.200 I used to get letters and phone calls when I 0:14:15.240 --> 0:14:18.560 was in charge of the CFA program and people said, well, 0:14:18.640 --> 0:14:20.920 you must have some mistake. I got a letter that 0:14:21.000 --> 0:14:24.400 said I failed the exam. There must be some mistake there. 0:14:24.520 --> 0:14:28.480 I have a degree from fill in your blank, Ivy 0:14:28.520 --> 0:14:31.640 League University. I've never failed any exam in my life. 0:14:32.720 --> 0:14:35.840 And something is wrong with you folks. Doesn't the Sea 0:14:36.080 --> 0:14:40.200 Institute know about the gentleman cy? And the interesting thing 0:14:40.240 --> 0:14:43.640 there is that my response and I didn't respond in 0:14:43.680 --> 0:14:46.440 these terms, but um I I did a much nicer 0:14:46.480 --> 0:14:49.120 way than this. But I used to say, you know, 0:14:49.560 --> 0:14:52.400 this is a meritocracy. We don't know who you are. 0:14:52.520 --> 0:14:55.760 We don't know your lineage. It's how you do on 0:14:55.800 --> 0:15:00.200 that exam, and it means at eight percent of the 0:15:00.240 --> 0:15:02.920 candidates did better than you. And and you know, we 0:15:02.960 --> 0:15:05.720 had people from community colleges that were passing the exam 0:15:05.760 --> 0:15:07.680 and I used to say, you know, I think you 0:15:07.760 --> 0:15:09.840 might want to write your letter to your alma mater 0:15:09.960 --> 0:15:12.960 instead of us. They're the ones that failed you. So 0:15:13.040 --> 0:15:15.840 in the last minute or so, we have left. What 0:15:15.920 --> 0:15:19.560 does this credential NG do for investors? What does it 0:15:19.600 --> 0:15:21.480 do for corporate clients, and what does it do for 0:15:21.520 --> 0:15:25.640 investment banks? I think it really ups people's game. And 0:15:25.680 --> 0:15:28.640 when somebody is hiring a c FA charter holder around 0:15:28.720 --> 0:15:32.280 the world, and this is the same whether you're in Um, 0:15:32.320 --> 0:15:37.440 you know, Lagos, Nigeria, or Miami, Florida, you've gone through 0:15:37.480 --> 0:15:39.160 the same exam. If you have the letter c f 0:15:39.280 --> 0:15:41.480 A behind your name, it means the same thing. And 0:15:41.520 --> 0:15:44.800 you've attained that that that that level. And I think 0:15:44.800 --> 0:15:48.680 that employers know that you're really getting someone who not 0:15:48.840 --> 0:15:51.800 only has mastered a body and knowledge, but really had 0:15:51.800 --> 0:15:55.800 the discipline to go through it. Because it's an arduous process. 0:15:55.880 --> 0:15:59.320 As you said, in fact Um, most of the successful 0:15:59.360 --> 0:16:02.760 people failed at least one of those exams, and it's 0:16:02.800 --> 0:16:05.320 tough when those exams are only given with level two 0:16:05.320 --> 0:16:07.280 and three are only given once a year. So you 0:16:07.360 --> 0:16:10.080 really gotta buckled down and say, now I got to 0:16:10.120 --> 0:16:13.400 redo this all over and do even more work than 0:16:13.440 --> 0:16:15.480 I did last time. And I think it's a signal 0:16:15.560 --> 0:16:20.320 to UH two investors, to clients that these are these 0:16:20.320 --> 0:16:23.160 folks are bit really best to breed. I'm Barry Ridholtz. 0:16:23.200 --> 0:16:26.280 You're listening to Masters in Business on Bloomberg Radio. My 0:16:26.360 --> 0:16:29.680 special guest today is Dr Robert Johnson. He is the 0:16:29.680 --> 0:16:33.720 head of the American College of Financial Services. He used 0:16:33.760 --> 0:16:38.240 to run the entire cf A Institute Chartered Financial Analyst 0:16:38.360 --> 0:16:43.200 Testing program and the curriculum program, and is extremely knowledgeable 0:16:43.240 --> 0:16:47.360 about all things cf A related. Let's talk about a 0:16:47.400 --> 0:16:50.800 book you wrote way back when, called The Tools and 0:16:50.920 --> 0:16:55.240 Techniques of Investment Planning. What what motivated you do to 0:16:55.520 --> 0:16:58.760 pen a book of such a title. To be perfectly 0:16:58.800 --> 0:17:01.200 honest with you, I want to do I have had 0:17:01.240 --> 0:17:04.399 a relationship of professional relationship with the individual that I 0:17:04.440 --> 0:17:07.400 wrote it with, and it was an excuse for us 0:17:07.440 --> 0:17:10.520 to uh stay together. He worked with me at c 0:17:10.680 --> 0:17:14.320 FA Institute and it was an opportunity to continue working 0:17:14.320 --> 0:17:17.280 with him. His name is Tom Robinson. Tom is now 0:17:17.320 --> 0:17:20.960 the president and CEO of Double A CSB International, the 0:17:21.359 --> 0:17:25.159 accredited the Double A c s B, the accrediting agency 0:17:25.280 --> 0:17:29.680 that does uh collegiate schools of business. Oh, really, collegiate 0:17:29.840 --> 0:17:32.360 schools of business. So anybody who wants to my alamont 0:17:32.440 --> 0:17:35.360 is Stonybrook. They added a school of business recently. They 0:17:35.400 --> 0:17:37.120 had to jump through his hoops. They have to jump 0:17:37.160 --> 0:17:41.280 through those hoops recently, years ago, recently. Um, that's interesting. 0:17:41.280 --> 0:17:43.920 I don't even know such a thing. I assumed it existed. 0:17:44.000 --> 0:17:47.720 I never knew what the acronym it was. So let's 0:17:47.720 --> 0:17:50.879 talk a little bit about the details of that. What 0:17:51.080 --> 0:17:55.400 should clients expect from their relationship with their financial advisor. 0:17:56.080 --> 0:17:59.639 They should expect that that financial advisor is acting in 0:17:59.640 --> 0:18:04.119 their interest. And unfortunately, what we have now is that 0:18:04.160 --> 0:18:08.000 the landscape, I believe, is that we have what you 0:18:08.000 --> 0:18:12.399 would refer to Barry as a financial services industry and 0:18:12.520 --> 0:18:16.520 not a financial services profession. And I think you're a 0:18:16.600 --> 0:18:20.879 profession if you have three qualities, and those three qualities 0:18:20.960 --> 0:18:25.760 or knowledge that the second is that you have some experience, 0:18:26.480 --> 0:18:28.879 and the third thing that makes you a professional is 0:18:28.920 --> 0:18:32.000 that you aspire to a code of ethics. And whether 0:18:32.040 --> 0:18:34.760 you're a doctor, whether you're a lawyer or an architect, 0:18:35.200 --> 0:18:39.720 whatever your profession, a profession has to have those three elements. 0:18:39.960 --> 0:18:45.120 And I think that's why, unfortunately the financial services financial 0:18:45.160 --> 0:18:48.160 services is referred to as an industry instead of a profession. 0:18:48.240 --> 0:18:49.600 And one of the things we want to do with 0:18:49.680 --> 0:18:52.560 the American College that C. F. Anstude is doing in 0:18:52.600 --> 0:18:56.520 the investment management realm, in financial planning is we want 0:18:56.520 --> 0:19:00.399 to make financial services a profession. That's what we buyer 0:19:00.440 --> 0:19:03.520 to do. So I'm on the same side of the 0:19:03.560 --> 0:19:06.400 boat as you. I think we should have a fiduciary standard. 0:19:06.440 --> 0:19:09.640 I think the best interests of the client should be paramount. 0:19:10.080 --> 0:19:12.960 But let me, however, briefly take the other side of 0:19:13.000 --> 0:19:16.520 the argument. This is what in the we just finished 0:19:16.520 --> 0:19:22.040 a fairly robust debate about the fiduciary standard on retirement accounts. 0:19:23.119 --> 0:19:27.400 I argued against people who said we shouldn't do that. 0:19:28.400 --> 0:19:31.000 I said, there's no reason we shouldn't. But let me 0:19:31.080 --> 0:19:35.040 push back, and and here's the argument that they said, Well, 0:19:35.080 --> 0:19:39.000 if we're on the brokerag side, we have our own 0:19:39.040 --> 0:19:42.840 ethical code that we're obligated to be maintain a certain 0:19:42.920 --> 0:19:46.959 level of ethical standard. We may not have a fiduciary obligation, 0:19:47.040 --> 0:19:49.639 but we certainly have to know our clients and have 0:19:50.119 --> 0:19:54.080 only offer them suitable investments. And if we engage in 0:19:54.119 --> 0:19:58.760 any behavior that transgresses from that, we could be penalized 0:19:59.280 --> 0:20:02.439 or or I heard from the industry, what's what's wrong 0:20:02.520 --> 0:20:05.920 from with that argument? I think suitability burries a pretty 0:20:05.920 --> 0:20:09.800 low hurdle, to say the least. But I'm trying really 0:20:09.840 --> 0:20:12.760 hard to take that side of the case. It's not easy. 0:20:12.960 --> 0:20:15.600 I don't think I really don't think there's a lot 0:20:15.640 --> 0:20:22.119 of people that oppose the statement that that people in 0:20:22.119 --> 0:20:26.680 the financial services and i'll say profession here should act 0:20:26.720 --> 0:20:28.600 as a fiduciary. I don't think there are many people 0:20:28.600 --> 0:20:31.560 would argue with that. Where people are arguing is this 0:20:31.640 --> 0:20:37.160 fiduciary standard, and that that it is fairly nebulous. For instance, 0:20:37.240 --> 0:20:42.160 reasonable fees. We'll define what reasonable fees are, define how 0:20:42.280 --> 0:20:46.840 much somebody needs to know in terms of fulfilling that 0:20:46.920 --> 0:20:51.440 fiduciary standards. So let's separate that fact that we all 0:20:51.480 --> 0:20:54.800 agree that people should be a fiduciary with the fact 0:20:54.840 --> 0:20:57.520 that of course, the devil's in the details. Well, there 0:20:57.560 --> 0:21:01.280 are such things as best practices. You can could average costs, 0:21:01.320 --> 0:21:04.680 and there's always a gray line. Well, if the averages, 0:21:04.720 --> 0:21:06.320 I'm going to use a fat round number. If the 0:21:06.320 --> 0:21:09.359 average is one percent, and you think you're doing something 0:21:09.480 --> 0:21:11.920 special and you're charging one in a quarter and one 0:21:11.960 --> 0:21:15.320 and a half percent, I don't think anyone's gonna argue 0:21:15.320 --> 0:21:18.359 that that is uxurious. On the other hands, when we 0:21:18.400 --> 0:21:24.280 see nine percent and really multiples of an average one percent, 0:21:24.800 --> 0:21:28.439 that that's a pretty bright line variation. So where it 0:21:28.480 --> 0:21:32.800 gets a little challenging is okay, one percent is is standard. 0:21:33.200 --> 0:21:34.920 One in a quarter is a little high, but it's 0:21:34.920 --> 0:21:38.520 not ridiculous one and a half, especially for smaller accounts. 0:21:39.840 --> 0:21:44.280 The question becomes, shouldn't it simply be what's in the 0:21:44.359 --> 0:21:47.680 best interest of the client? Hey, here's our fee structure. 0:21:47.720 --> 0:21:50.960 Were transparent, We're gonna disclose our fees. It's all out 0:21:50.960 --> 0:21:53.440 in the open. There's no conflicts. Nobody else is paying 0:21:53.520 --> 0:21:56.760 us uh under the table, it's all here in front 0:21:56.760 --> 0:22:00.359 of you. It should be fairly easy to make the 0:22:00.480 --> 0:22:04.720 interest of the clients that that shouldn't be a challenging standard. 0:22:04.760 --> 0:22:09.240 Best interest or fiduciary should it? I think the worry is, 0:22:09.280 --> 0:22:11.720 after the fact, how are you going to judge best interest? 0:22:11.760 --> 0:22:14.399 And let me give you just uh an idea of 0:22:14.440 --> 0:22:17.679 what I mean. Most of the studies out there, and 0:22:17.720 --> 0:22:19.840 you know this, most of the studies out there show 0:22:19.920 --> 0:22:26.640 that active managers underperform the indexes over the long haul. Right, 0:22:27.680 --> 0:22:29.800 So if you take the fiduciary standard, and I know 0:22:29.880 --> 0:22:31.760 that it's not going to be taken to the limit, 0:22:31.800 --> 0:22:35.679 but if you take the fiduciary standard to the limit, gosh, 0:22:35.760 --> 0:22:38.720 isn't the best interest to put people in index funds 0:22:38.840 --> 0:22:42.399 that are virtually no cost? Now because index funds the 0:22:42.440 --> 0:22:44.439 cost has gone to zero, and the wealth of the 0:22:44.480 --> 0:22:48.520 evidence shows that at most active managers failed to beat 0:22:49.359 --> 0:22:51.840 I think, listen, that's how I manage money. But that's 0:22:51.880 --> 0:22:55.560 not what necessarily what everybody wants. Some people. If someone 0:22:55.640 --> 0:22:58.480 says to me, look, I would be bored with that 0:22:58.600 --> 0:23:00.359 and I wouldn't be able to stay with So I 0:23:00.400 --> 0:23:04.960 need something just to keep me interested. You could talk 0:23:05.000 --> 0:23:06.760 till you're blue in the face to that person. I 0:23:06.760 --> 0:23:11.440 could say, look, all the academic data says overwhelmingly your 0:23:11.480 --> 0:23:16.320 best bet is low cost. Broadly diversified global indices, you 0:23:16.440 --> 0:23:20.480 rebalance it regularly, see you next year. Investing should be boring. 0:23:21.000 --> 0:23:24.320 If a person says to me, I can't do that, 0:23:24.320 --> 0:23:25.840 that would board me out of my mind. Then I 0:23:25.880 --> 0:23:28.359 know in six months i'd be on too. The next advisor. 0:23:28.800 --> 0:23:30.880 Well me personally, I would say, well, let me save 0:23:30.880 --> 0:23:33.040 you the six months and go find another advisor now, 0:23:33.080 --> 0:23:36.080 and we'll we'll just say, hey, this isn't a great fit. 0:23:36.480 --> 0:23:39.520 But what about the advisor who understands that this guy 0:23:40.040 --> 0:23:43.439 needs a little excitement in his life and and Sunday 0:23:43.520 --> 0:23:46.879 night football doesn't get it done for him, and understands 0:23:46.960 --> 0:23:49.760 the risk he's taking. It's weird for me to make 0:23:49.800 --> 0:23:51.520 this argument because I don't believe any of it. But 0:23:51.760 --> 0:23:54.360 he understands the risk he's taking in order to try 0:23:54.400 --> 0:23:59.320 and capture alpha, that he might actually forego beta. But 0:23:59.440 --> 0:24:02.399 he needs some of his portfolite. Here. We'll take ten percent. 0:24:02.680 --> 0:24:05.600 We'll put you in this high octane slug and maybe 0:24:05.640 --> 0:24:09.040 that will keep you focused on this so we could 0:24:09.080 --> 0:24:11.600 let the bulk of your portfolio do what it's supposed 0:24:11.600 --> 0:24:15.399