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Welcome to Personal Finance for
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long-term investors, where we believe
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Benjamin Franklin's advice that an
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investment in knowledge pays the best
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interest both in finances and in your
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life. Every episode teaches you personal
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finance and long-term investing in
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simple terms. Now, here's your host,
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Jesse Kramer. Hello, and welcome to
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episode 107 of Personal Finance for
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Long-Term Investors. My name is Jesse
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Kramer. Later in today's episode, Don
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McDonald is going to join us. Don is a
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longtime financial radio host of a show
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called Talking Real Money. He's an
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author, an educator known for his
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non-nonsense approach to investing in
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personal finance. I feel a bit of a
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kindred spirit to Don because Don and
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his business partner, they use their uh
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radio show to springboard into providing
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fee only evidence-based fiduciary
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financial planning work. And although my
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path is a little different, I've ended
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up in a similar spot using my blog in
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this podcast to end up working at a fee
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only evidence-based fiduciary financial
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planning firm here in in Rochester, New
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York. Now, Don hates annuities. I feel
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pretty similarly, and that's a lot of
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what we talk about today. But before
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Don, let's do a review of the week. The
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doctor's orders wrote in and said, "The
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right prescription. I'm a semi-retired,
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almost 70-year-old physician who listens
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to a lot of retirement, investment, and
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economics podcasts. I actually don't
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recall how I stumbled on your podcast a
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few months ago. However, you are amongst
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the top few in terms of clear and
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efficient communication, giving both
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broad concepts and applicable practical
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points. You are able to distill
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complicated topics without making it
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unrealistically simple. Keep up the good
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work. Well, thank you the doctor's
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orders. I appreciate the kind words and
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the five-star review. Feel free to shoot
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me an email to jesse at
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bestinterinterest.blog and we will get
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you a really nice, super soft bestinest
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t-shirt. But before we get to Don
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McDonald today, since we're talking
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about annuities and insurance sales
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people who call themselves financial
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adviserss, really what we're talking
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about is this this spectrum of good
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adviserss and bad adviserss and the
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messy spaghetti ball of different types
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of adviserss out there. And so in honor
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of that conversation, I want to do
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something fun. I want to go through an
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article from the Wall Street Journal
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that I absolutely love. It's called the
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19 questions to ask your financial
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adviser. the burden of finding an
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adviser who will act in your best
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interest is on you. It's written by
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Jason Zwag. Perhaps the best modern
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financial journalist simply respected as
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as among the best. And the reason I'm
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reading this particular article and not
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a different list that maybe I put my
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finger on is because I want to share a
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neutral outside expert's opinion on
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these questions, not my own opinion. And
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I'm sure my own opinion has some bias to
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it. So I want to go through Jason's list
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as he wrote it. At the end though, I do
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think there are a couple extra, you
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know, non-controversial questions that I
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believe also makes uh sense for you to
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ask to add onto this list. So, I'll
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sprinkle those in at the end without too
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much extra comment and then you can make
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up your own mind if you think it's worth
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it. And if you want a copy of this
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article for your own records, please
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shoot me an email to jessebinest.blog
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and I will email a PDF to you. So, for
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the article, I'm going to skip the the
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intro to the article and I'm going to go
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straight to the list to the 19 questions
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because I think that's the place where
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most readers go to and and that's really
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just what I want to share with you
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today. The way that Jason Zwag wrote
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this article is he poses the question
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that you ought to ask your financial
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adviser or any financial adviser who you
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might be interviewing. And then Jason
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proposes his ideal answer, the way that
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the adviser should be answering this
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question. And I'll give that to you as
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well. And then in some cases I'll I'll
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mention why I agree, why I disagree and
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just why potential advisor's answers
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might be different. Again, just to add
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some color to your understanding. So the
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first question, are you always a
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fiduciary and will you state that in
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writing? Jason Zwag says the answer
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should be yes. I also say the answer
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should be yes. I do want to caveat that
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though with something I brought up in
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episode 90, an AMA episode that
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unfortunately the fiduiary filter alone
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isn't as good as it used to be. It's
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still very important. But what I mean by
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that is some people will tell you that
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they are a fiduciary. And the reason why
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is because they probably have an ethical
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fiduciary obligation. That's different
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than a legal fiduciary obligation. And
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it's too bad that there's that confusion
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out there. But essentially, if someone
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has a legal fiduciary obligation, it
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means that if they don't act in your
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best interest, you ought to take them to
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court. That's the level of fiduciary
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obligation that I have. It's it's legal.
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If someone only has an ethical fiduciary
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obligation, well, then we get into a bit
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of a gray area because now there's
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almost a little bit of he said, she said
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where they could defend themselves and
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saying, "I I believe I was acting in
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your best interest even if maybe they
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they weren't." So again, that's where I
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think the the legal fiduciary obligation
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really is the important one there. The
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second question, does anybody else ever
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pay you to advise me? And if so, do you
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earn more to recommend certain products
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or services? The answer there should be
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no. Totally agree. Right. All else equal
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someone who's earning a commission to
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sell you a particular insurance product
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or to make certain trades in your
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portfolio. That's a conflict of interest
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with what's in your best interest. And
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so we don't want commissions all else
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being equal. The third question, do you
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participate in any sales contests or
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award programs creating incentives to
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favor particular vendors? The answer
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there should be no and I agree with
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that. All else being equal, right, the
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investment advice that an adviser
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provides to you should be conflict free.
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It should be what's in your best
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interest. And if they're participating
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in a sales contest or an award program,
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if they're getting an incentive to favor
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a particular vendor, well, all of a
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sudden, that's not in your best interest
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anymore. The fourth question, will you
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itemize all your fees and expenses in
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writing? The answer there should be yes.
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I agree. The answer there should be yes.
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A fee schedule should be really simple,
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right? Fees should be really simple to
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understand. It should be a certain
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percentage, an hourly rate, a number per
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year, or a number per month. Very
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straightforward. Very straightforward.
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Number five, are your fees negotiable.
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Jason Swag says the answer should be
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yes. I actually have mixed feelings on
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this one. The reason why, I mean, I've
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been now doing this for three and a half
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years, and sure, plenty of people have
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asked me if they can negotiate our fees.
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The problem that we run into, though, is
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if I have two different clients, right,
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the Smiths and the Joneses. And if the
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Smiths are paying our normal fee, but
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then the Joneses have negotiated down to
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say 20% off our normal fee. Now, in my
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head, it's like, do I have an incentive
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to serve one of them more than the other
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because one is actually paying us more?
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I don't want to enter that brain space
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if I can help it. And then the second
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problem or the other side of that same
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coin is if I am serving them totally
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equally, is that really fair to both
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clients? Or really, I kind of forget my
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example which one's paying more. But
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let's say the Smiths are paying more. Is
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it fair to the Smiths that I'm giving
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the Joneses the same exact level of
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service, the same exact benefits, I'm
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providing everything the same to them
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except they're paying 20% less? Those
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are some of the maybe ethical conundrums
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that we face with fee negotiations. And
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that's why all being equal, we try
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extremely hard to not negotiate fees. We
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don't want to negotiate fees. If there
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ever is a time when when someone is
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leaning on us hard, maybe we'll consider
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giving someone a a break for a quarter
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or two to get their foot in the door,
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but then we quickly say, "Hey, we know
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what we're worth. We know the value we
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bring, and we are going to make you
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return to our standard fee schedule
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going forward." So, there's one where I
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break with Zwag. I'm interested to hear
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uh any of your listeners thoughts out
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there. The sixth question, will you
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consider charging by the hour or
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retainer instead of an annual fee based
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on my assets? Jason Zwag says the answer
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should be yes. And I think it's so
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important that there are different fee
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models out there for different types of
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investors. At one time, my firm,
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Cobblestone, we offered hourly
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consultations. Ultimately though, as a
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business, we were finding more success
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and more clients via our annual fee
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schedule. And as a business, I think
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sometimes you have to come to a
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crossroads, right? Do you spread
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yourself thin over different services or
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do you double down on what's working
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well? And we as a business, we doubled
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down on what's working well. We're glad
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we did. And so now our fee model is an
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annual fee. We don't do hourly
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consultations anymore. But some people,
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including some of you listening, maybe
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all you want or maybe all you need is an
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hourly consultation. And I think it's
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great that there are some planners out
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there who have built that business to
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meet that demand. Number seven, can you
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tell me about your conflicts of interest
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both orally and in writing? Zwag says
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the answer should be yes. He also says
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that no adviser should deny having any
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conflicts. And I totally agree. Every
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adviser out there has conflicts of
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interest. Just like every barber or
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every landscaper out there has conflicts
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of interest, every barber has a conflict
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because if they tell you that you need a
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haircut, well, that's their revenue. And
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every landscaper out there says, "Of
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course, you should put in a sidewalk
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here because that's their revenue."
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Their revenue to some extent is your
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loss. It's what you're paying. And that
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is a natural conflict of interest.
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Therefore, it's really important to
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understand how someone gets paid. In
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general, from what I've seen, the AUM
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fee only model, the retainer model, and
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the hourly model are the most beneficial
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for clients. Those advisers are
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incentivized to do good work over the
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long run on your behalf. You win
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together. They're incentivized to retain
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you as clients, to be fair to you as
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clients, and to make this a long-term
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long-term win-win relationship. Now, the
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commissionbased fee models that I've
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seen are generally not ideal since their
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incentives are not aligned with the
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typical long timelines of their clients.
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In general, those are more salesoriented
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incentives where the main incentive is
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just to get to say yes today to make a
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sale. And even if the advice isn't
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always in the client's best interest,
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that is a conflict with what the adviser
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wants in those situations. So anyway,
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the answer there, just to get back to
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Zwag's question, every adviser has some
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level of conflict of interest. And the
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important thing is that both you as a
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client and your adviser that you both
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know that and that you understand what
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that is. Number eight, do you earn fees
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as an adviser to a private fund or other
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investments that you may recommend to
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clients? The answer there should be no,
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and I agree. Number nine, do you pay
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referral fees to generate new clients?
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The answer there should be no. And I
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agree that one and I think there's
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another one. We'll go with we'll get to
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it to number 11 and I'll skip ahead to
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number 11 and then I'll kind of tackle
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them all at once. Number 11 is do you
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earn fees for referring clients to
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specialists like estate attorneys or
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insurance agents? No. So 9 and 11 to me
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are kind of two sides of the same coin,
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which is basically, you know, if a local
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accountant refers a client to me, do I
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pay that accountant for that referral?
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Or similarly, if I'm going to refer a
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client out to an accountant to do their
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tax work, am I expecting that accountant
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to pay me for it? And the answer should
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be no in both directions. Right? The
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whole fiduciary conflict of interest
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conversation is you need to avoid as
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many conflicts as you can. the one that
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naturally exists is the one that says,
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"Well, hey, you've got to pay me for the
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work I do." That's the natural conflict
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of interest. But outside of that, there
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really shouldn't be any conflicts of
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interest. And so, right, when it comes
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to referrals, I want an accountant to
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refer business to me because he thinks
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that I and my firm Cobblestone are
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simply a a terrific fit for this
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particular client. and I want to refer
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clients out to a trust and estate
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attorney or an insurance agent or an
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accountant because I believe that
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specific other professional can provide
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the solution that my client needs at a
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fair price. That's it. So again, there
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should not be any referral fees in
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either direction in in my opinion and
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Jason Wag's opinion too, I should say.
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Number 10 on the list. So we did 9 and
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11, now we're going back to number 10.
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Do you focus solely on investment
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management or do you also advise on
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taxes, estates, retirement and
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budgeting, debt management and
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insurance? And Zwig says here the best
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answer depends on your needs as a
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client. And I think that's fair. Every
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adviser probably has a slightly
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different focus or or just there there
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is a spectrum of what different
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adviserss do. Some will say all they do
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is investment management. Others will do
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no investment management at all and all
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they do is planning work like retirement
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planning or tax planning. here my my
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colleagues and I we provide what we
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believe is holistic comprehensive wealth
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management. So it is it's inclusive of
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investment management, tax advice,
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estate planning, retirement planning,
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simple budgeting, debt management. We do
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things like we will help a client
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understand their insurance need. We
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don't sell insurance though, right? That
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would be a conflict. We will help a
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client do tax planning, but we don't
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file taxes because again that's a
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conflict. We don't write legal documents
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cuz that's a conflict. But we advise on
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all this stuff and we have in-house
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experts when it comes to this stuff. We
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will come back to those in-house experts
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when it comes to question 17. But again,
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I think it's fair what Jason Zw says is
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you as a client, you need to understand
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what your advisor's focus is. Are they
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investing only? Are they planning only?
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Do they do a whole bunch of stuff? And
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if they do do a whole bunch of stuff, do
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they really have the expertise to do it?
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You should ask that question. But the
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best answer for you will depend on your
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needs as a client. We already did number
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11, so let's go to number 12. What is
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your investment philosophy? And this is
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an interesting one because Zwag doesn't
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have a proposed best answer here. Again,
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I think that's fair because I've had
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clients come to me before and their
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personal investment philosophy is say
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they want no risk. All they ever want to
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do is hold bonds. So, build me a bond
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portfolio. Now, I don't really think
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that's the best way to go about the
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investing problem, especially if someone
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is say younger. I've had other clients
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come to me and they say maybe um hey,
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what is Cobblestone's thoughts on
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crypto? Well, we don't invest in crypto.
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So, if you want us to build you a crypto
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portfolio, sorry, we're we're not the
00:13:28
right firm for you. I think our
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investment philosophy is very much in
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line with with all the things I I talk
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about here on the podcast, if you're
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curious, and that's one of the reasons
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why I it's one of the reasons why I feel
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good talking about the things I talk
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about here on the podcast. But yeah, it
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is important for you to ask your adviser
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what their investment philosophy is, and
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hopefully their investment philosophy
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matches up pretty well with your
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understanding of the world. Number 13.
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Do you believe in technical analysis or
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market timing? The answer there should
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be no. I agree. Technical analysis for
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those who don't know is where an analyst
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will look at charts almost like reading
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the tea leaves and saying, you know,
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because of the way that this particular
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stock or because of the way that this
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particular index has behaved over the
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last day or the last week or the last
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month, I can therefore predict how it
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will behave in the near-term future.
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Yeah, that's to me at least that's been
00:14:17
debunked. seems to be a bit of an
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ongoing debate in the investing world
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whether there's any merit to it or not.
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I personally don't see the merit to
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that. And it's related to market timing.
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Again, it's the whole idea of do I
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believe I know enough to know when the
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market is about to move drastically in
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one direction or another and will I make
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kind of ad hoc decisions based on that?
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The answer there should be no. Number 14
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is a similar but it is a nuance and
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important different question. Do you
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believe you can beat the market? Zig
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says the answer there should be no. And
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yeah, the short answer is no. But there
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is a longer answer that I think is worth
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covering here because I've talked about
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it here on the podcast before. And I'm
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gonna name two um specific famous Nobel
00:14:58
academics, Eugene FMA and Ken French.
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Huge proponents of index investing and
00:15:03
you know, huge proponents of this idea
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that you can't stock pick or market time
00:15:08
your way to to beat the market. But they
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won their Nobel Prize for their work in
00:15:12
what's called factor investing. And in
00:15:14
short, they found that at least so far
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in history, one can outperform the
00:15:19
market average over a long period of
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time by tilting your portfolio towards
00:15:23
certain factors. Now, what are these
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factors? Well, perhaps the most
00:15:26
well-known factor is that value stocks
00:15:30
tend to outperform growth stocks.
00:15:32
Another famous one is that small
00:15:33
companies tend to outperform large ones.
00:15:36
Cheap companies outperform expensive
00:15:38
ones. That's like on a price to earnings
00:15:39
ratio basis. profitable companies
00:15:42
outperform the less profitable ones and
00:15:44
that's sometimes called a quality
00:15:45
factor. And then conservative companies
00:15:48
tend to outperform aggressive ones. Now,
00:15:50
these factors, they haven't always been
00:15:53
true all the time. They're not going to
00:15:55
lead you to be filthy rich if you follow
00:15:58
them, but the academic research shows
00:16:00
that if you tilt your portfolio in these
00:16:02
directions over time, they can lead to
00:16:05
outperformance. Now, there's an entire
00:16:07
nerdy detailed podcast episode tied up
00:16:10
in this topic, but the reason I mention
00:16:11
it, it goes back to the idea of
00:16:12
evidence-based investing. Now, F and
00:16:14
French, like I said, they don't believe
00:16:16
in stock picking, but they do believe in
00:16:17
tilting a portfolio in favor of these
00:16:19
evidencebased factors, and so do we, and
00:16:21
and so do I. Question number 15, how
00:16:24
often do you trade? Zwag says the answer
00:16:26
should be as seldom as possible.
00:16:28
Ideally, once or twice a year at most.
00:16:31
Yeah, in large part, I agree with that.
00:16:33
I'm assuming rebalancing a portfolio is
00:16:35
different than trading in this case. I
00:16:37
think trading to swag means, you know,
00:16:39
how often do you make a decision about,
00:16:42
you know, should you be 68% US and 32%
00:16:45
international? Should you go slightly
00:16:46
slightly underweight, slightly
00:16:48
overweight? I assume that's what he
00:16:49
means there. Rebalancing, I think, can
00:16:51
occur more often than once or twice a
00:16:52
year. You know, quarterly is is fine. If
00:16:55
you have a rules-based system where you
00:16:56
say if a portfolio gets more than 3% or
00:16:59
more than 5% out of normal waiting then
00:17:01
you rebalance that's fine and it's
00:17:03
important that you have a rules-based
00:17:05
rebalancing system. But right on the
00:17:07
whole trading tends to lead to capital
00:17:09
gains. Trading tends to lead to some
00:17:11
drag on the portfolio and overtrading is
00:17:14
by far a larger problem than than
00:17:17
undertrading. Question number 16. How do
00:17:19
you report investment performance? And
00:17:21
then Zlag says you should report it
00:17:23
after all expenses compared to an
00:17:25
average of highly similar assets that
00:17:27
includes dividends and includes interest
00:17:29
income. And you should report it over
00:17:31
the short term and the long term. And I
00:17:33
totally agree. Investment performance
00:17:35
should be shown net of all fees like
00:17:37
what has the investor earned after
00:17:39
they've paid their fees. It should be
00:17:41
shown compared to a benchmark. And
00:17:43
that's what Zwag was saying, an average
00:17:44
of highly similar assets. Performance
00:17:47
should include dividends and interest
00:17:49
income. Absolutely. and so should the
00:17:51
benchmarks. And that's a a really, as
00:17:53
you'll hear with Don McDonald later, one
00:17:55
of the oldest tricks in certain advisors
00:17:58
books is to compare their uh products
00:18:03
performance and they'll compare it to
00:18:05
say the Dow Jones or the S&P 500, but
00:18:08
they won't include dividends in the
00:18:10
returns of the S&P 500. And that's such
00:18:13
a fundamentally flawed thing to do. It's
00:18:16
so sneaky and and bad to do. So anyway,
00:18:20
benchmarks should always include
00:18:21
dividends and interest income. And then
00:18:23
yes, the timelines of investment
00:18:25
performance should be shown. Yeah, you
00:18:27
can show quarterly and year-to-ate
00:18:28
performance, but you should also show
00:18:30
three, five, and 10 year performance and
00:18:32
and longer time periods too. Question
00:18:34
17, which professional credentials do
00:18:36
you have and what are their
00:18:37
requirements? Ben Zwig says among the
00:18:40
best are the CFA, chartered financial
00:18:42
analyst, the CPA, certified public
00:18:44
accountant, and CFP, certified financial
00:18:47
planner, which all require rigorous
00:18:49
study, continuing education, and
00:18:51
adherence to high ethical standards.
00:18:53
Many other financial certifications are
00:18:55
marketing tools masquerading as fancy
00:18:57
diplomas on an advisor's wall. I agree
00:18:59
with this. Here, our firm, Cobblestone,
00:19:02
we have seven certified financial
00:19:03
planners. And I should say, I think we
00:19:05
have 42 employees now. seven certified
00:19:07
financial planners, six chartered
00:19:09
financial analysts, two CPA accountants,
00:19:11
we have an attorney, trust and estates.
00:19:14
He started in trust and estates, like I
00:19:15
said earlier, he doesn't write legal
00:19:17
documents anymore, but he's a T&
00:19:18
attorney and and taxation attorney. And
00:19:20
then I think we actually have four
00:19:22
younger employees right now, all
00:19:24
simultaneously studying for their CFPs,
00:19:26
which is just awesome. They're kind of
00:19:27
taking the initiative there. But yeah,
00:19:29
going back to the earlier earlier
00:19:32
question about what do you focus on? Is
00:19:34
it solely investment management or is it
00:19:36
more? Is it comprehensive wealth
00:19:37
management? And why? I mean, one of the
00:19:38
thoughts that we have is, you know,
00:19:40
there's a reason we're able to provide
00:19:42
this comprehensive wealth management.
00:19:43
And in large part, it's because of the
00:19:45
the expertise we have on staff. I think,
00:19:46
you know, just doing some math in my
00:19:48
head, that's what 17 credentials
00:19:51
professionals, I think, out of 42
00:19:52
employees with four more waiting in the
00:19:54
wings. And it's important that we
00:19:56
provide that kind of expertise to the
00:19:58
people that we work with. Question
00:19:59
number 18. After inflation, taxes, and
00:20:02
fees, what is a reasonable estimated
00:20:03
return on my portfolio over the long
00:20:05
term? Then Zwag says, "If I told you
00:20:08
anything over 3 to 4% annually, I'd be
00:20:10
either naive or deceptive." And I agree
00:20:12
with what Zwag is saying here. And the
00:20:14
math explains pretty clearly why that
00:20:17
is. So, let's start with a say a typical
00:20:19
60/40 portfolio. If we look at
00:20:21
historical track records, that portfolio
00:20:23
over a long period of time might return
00:20:25
something in the 8 to 9% per year range.
00:20:28
First, we have to take out whatever fees
00:20:30
an advisor is charging you. So, maybe
00:20:31
that 8 to 9% drops down to, let's say, 7
00:20:34
to 8% per year. Then, we have to take
00:20:36
out taxes. Again, depending on the
00:20:39
actual proceeds there, if you earned 9%
00:20:42
in your portfolio, odds are the tax bill
00:20:44
is going to be between 1 and 2% of that.
00:20:46
So, we were at 7 to 8. Now, we're
00:20:48
probably going to drop to something like
00:20:50
5 1/2 to 6 1/2, something like that. And
00:20:53
now, we have to think about inflation.
00:20:55
And if inflation is 2 to 3%, well, let's
00:20:58
just use 2 and a half% there as the
00:20:59
inflation number. Our 5 and 1 half to 6
00:21:01
and a half drops down to 3 to 4%. So
00:21:04
again, that's after inflation, after
00:21:06
taxes, after fees. The real after tax
00:21:09
return that a investor will get is
00:21:11
something to 3 to 4% annually. That's
00:21:13
still growth, right? Real growth is real
00:21:15
growth. And that's what we want. We want
00:21:17
to have postinflation real growth in our
00:21:20
portfolio. But for someone to sit there
00:21:21
and say your portfolio is going to grow
00:21:23
at 10% per year, right, that's not
00:21:26
exactly the truth. There's a little bit
00:21:28
of obfuscation there. Granted, the way
00:21:30
the question is worded is after
00:21:32
inflation, after taxes, after fees. And
00:21:35
that that is the way to ask this
00:21:36
question if you're out there speaking to
00:21:38
adviser. The gross return of your
00:21:40
portfolio is nice to understand, but
00:21:42
really that the number that you care
00:21:44
about as a investor or you care about as
00:21:46
a client is after inflation, after
00:21:49
taxes, after fees. And that brings us to
00:21:51
question 19. Who manages your money, Mr.
00:21:54
or Mrs. Adviser? And the answer that
00:21:57
Zwag proposes is that I do. And I invest
00:22:00
in the same assets as I recommend to my
00:22:02
clients. And again, I love this
00:22:04
question. And this question actually was
00:22:06
part of the reason why when I started
00:22:07
working here I was like you know what
00:22:09
this is a really important question and
00:22:11
I wanted to dive deep on the way that we
00:22:13
invested our assets anyway. And so right
00:22:16
my investable accounts my old 401k you
00:22:18
know I rolled it over into an IRA and
00:22:21
it's managed here in the same exact way
00:22:23
in the same exact individual securities
00:22:25
right the same strategy the same
00:22:27
securities as what my clients hold. So
00:22:30
when I'm working with say a much older
00:22:32
client, maybe they're in a much more
00:22:33
conservative 50/50 portfolio. I'm in a
00:22:36
more aggressive 8020 portfolio. So the
00:22:38
the fractions are different, right? The
00:22:40
percentages are different, but the
00:22:42
actual ticker symbols, the actual assets
00:22:44
that we own are one and the same. I
00:22:46
invest in the same assets that I
00:22:48
recommend to my clients. And I think
00:22:49
there's some real power in that. And
00:22:51
there's some truth in that. And if
00:22:52
someone doesn't necessarily do it that
00:22:54
way, it's worth understanding why. It
00:22:57
definitely is worth understanding why.
00:22:58
So, that's Jason Zwag's 19 questions,
00:23:00
and I think they're 19 great questions.
00:23:02
And as I said, if you want a copy of
00:23:03
this, I'm I'm absolutely happy to send
00:23:05
you the PDF version that I have. I did
00:23:07
mention earlier that there are a couple
00:23:08
more questions that I just think they're
00:23:10
very simple, very straightforward, and I
00:23:12
think worth adding to this list. The
00:23:14
first one is to ask the adviser, what's
00:23:16
your succession plan? I think it's
00:23:18
important for any adviser out there to
00:23:20
ask themselves, well, if I got hit by a
00:23:22
bus, what would happen to my clients? or
00:23:25
there comes a certain age when it's
00:23:27
simply hey if you're looking to work
00:23:29
with a adviser who's 55 they probably
00:23:31
have a wealth of experience but if
00:23:33
you're 55 yourself let's say you know
00:23:36
let's face facts your adviser might be
00:23:38
retiring in 10 years and you're still
00:23:41
going to have 20 years of life after
00:23:42
that point so you might have to go find
00:23:44
a new adviser or maybe they have an
00:23:46
internal succession plan and I just
00:23:48
think it's worth understanding that your
00:23:50
timeline as a client might not match up
00:23:52
with your adviser's timeline in their
00:23:54
career And it's just worth having that
00:23:56
conversation up front. The second
00:23:57
question I would add is what is the
00:24:00
communication cadence that you should
00:24:02
expect as a client of a particular
00:24:04
adviser. Different folks have different
00:24:05
expectations there, right? If someone
00:24:07
comes to me and they say, "You know
00:24:08
what, Jesse? I I really want to have a a
00:24:10
weekly roundup call every Friday
00:24:13
afternoon to hear how my portfolio is
00:24:15
doing." I'll tell them up front like,
00:24:16
"Hey, that's not really how I do things.
00:24:18
That's too much. It's too much time and
00:24:20
that's not how I approach my client
00:24:22
service. It's also not how I think you
00:24:24
should approach the investing problem as
00:24:26
it were to have a weekly check-in. If
00:24:28
instead someone said, you know what,
00:24:29
Jesse, I'm hiring you and to be honest
00:24:31
with you, I don't really want to hear
00:24:33
from you. I just, you know, I'll let you
00:24:35
know when I'm ready to talk and it might
00:24:36
not be for 5 years. I also don't think
00:24:38
that's very good. I think it's important
00:24:40
part of the financial planning process
00:24:41
is to have some regular check-ins. But
00:24:43
anyway, I do think it's important for
00:24:45
you as a client to have a pretty similar
00:24:48
expectation for communication cadence as
00:24:50
what your adviser how they tend to
00:24:52
operate. So, you should figure that out
00:24:53
upfront. The third question I think you
00:24:55
should ask is how many clients or how
00:24:58
many households or how many families
00:25:00
does your adviser work with or does the
00:25:02
firm work with? And perhaps you can add
00:25:05
to that too, what they believe an
00:25:06
appropriate amount is because again some
00:25:09
some advisers out there will say I work
00:25:11
with 50 families and the reason why is
00:25:13
because it's just me. I'm a solo adviser
00:25:16
and it takes a lot of work to work with
00:25:17
a family and I don't have any support
00:25:19
here and so 50 is the right number.
00:25:21
That's where I limit myself as. There
00:25:23
are some other adviserss I won't name
00:25:24
names or name firms but there are some
00:25:26
people I know who in their words they
00:25:29
would have over a thousand clients. Now,
00:25:32
the reason why that tends to be is
00:25:33
because their clients are someone who
00:25:34
they sold a product to and then haven't
00:25:38
really kept in touch with ever until
00:25:40
that product expires and it's time to
00:25:42
renew a new product. But just I mean,
00:25:44
think about it. If you had a thousand
00:25:45
clients, there's only 2,000 working
00:25:47
hours in the year. So, something there
00:25:50
doesn't quite add up. Depending on the
00:25:52
who you ask or depending on where you
00:25:54
look, the quote unquote appropriate
00:25:56
number of clients will vary. It probably
00:25:58
depends on the service that a adviser
00:26:00
plans on giving to their clients, too.
00:26:02
I've seen numbers anywhere from say 75
00:26:06
families up to 200 families being like
00:26:09
these reasonable numbers. I could see
00:26:11
arguments for for different numbers in
00:26:13
there, too. But either way, I I do think
00:26:15
to myself that somewhere in that range,
00:26:17
again, depending I think if someone says
00:26:19
they support more than that, hopefully
00:26:21
it's because they have a lot of backup,
00:26:23
you know, a lot of people behind them. I
00:26:25
know here, you know, we have, like I
00:26:27
said, 42 employees and we serve about a
00:26:30
thousand families and and the reason
00:26:32
why, you know, I've talked about it
00:26:33
before, we we split up responsibilities
00:26:35
here amongst a few different teams. We
00:26:37
have a a relationship management team
00:26:38
that I'm on, a financial planning team
00:26:40
where all our CFPs and our attorneys
00:26:42
sit, investing team where the CFAs sit.
00:26:45
And so, the idea is that it allows us to
00:26:47
to spread some of the planning or
00:26:49
portfolio management workload into
00:26:51
subject matter experts. But still right
00:26:53
now I'm working with like 60 families.
00:26:55
That number definitely has a lot of room
00:26:56
to grow. But still I can see the limits
00:26:59
coming right and I can see some of my
00:27:01
colleagues who maybe are working in with
00:27:03
120 or 140 families and they're just
00:27:06
doing the relationship management work.
00:27:07
They're just doing the client service,
00:27:08
the client facing work and it gets
00:27:10
really really busy at those numbers. So
00:27:12
it's it's worth understanding that
00:27:13
before you start working with an
00:27:14
adviser. And then the last question I
00:27:16
have is can I speak with a client or two
00:27:19
to hear their opinion? I think that's a
00:27:20
totally fair question to ask is anytime
00:27:23
you're you're looking to reach out to an
00:27:24
adviser, it just is a really hard
00:27:27
decision to make. I think when maybe
00:27:29
you've never worked with an adviser
00:27:30
before or maybe you're just having a
00:27:32
really hard time delineating between how
00:27:34
different advisory firms work or how
00:27:37
different adviserss work or the
00:27:38
difference between an insurance agent, a
00:27:40
broker dealer, a fiduciary adviser, you
00:27:43
know, it can be hard to tell the
00:27:44
difference. So asking them, hey, can you
00:27:47
put me in touch with a client to to hear
00:27:48
their opinion? I think is a worthy
00:27:50
question. Just know and and they're
00:27:52
probably only going to put you in touch
00:27:53
with a client who they know will give
00:27:55
them a positive review. I can certainly
00:27:57
say that when I've been asked that
00:27:59
question, I think of my clients who are
00:28:01
most likely to be, you know,
00:28:03
enthusiastic and optimistic and just say
00:28:05
like, "Oh, yeah, sure, Jesse. I'll talk
00:28:06
to one of your prospective clients. No
00:28:08
problem." Well, yeah, those are probably
00:28:09
also clients who will say good things
00:28:11
about me. I think most my clients will
00:28:12
say good things about me, but just know
00:28:15
it's a good question to ask, but just
00:28:16
keep it with a a grain of salt, right?
00:28:19
In terms of when you hear what the
00:28:20
client has to say. That's all. Here's a
00:28:23
quick ad and then we'll get back to the
00:28:24
show. I love getting your questions and
00:28:26
some of you ask me questions about the
00:28:28
wealth management firm I work for in
00:28:29
Rochester, New York. Others ask about
00:28:31
the best interest blog and this podcast,
00:28:33
Personal Finance for Long-Term
00:28:34
Investors, which operate without
00:28:35
advertising, without pushy sales, and
00:28:37
with no payw walls. How can the blog and
00:28:39
podcast stay afloat without me dumping
00:28:41
my own money into it? Well, to answer
00:28:43
both those questions, I want to point
00:28:44
you to episode 78 of Personal Finance
00:28:46
for Long-Term Investors. I intentionally
00:28:48
recorded episode 78 to shine light on
00:28:50
those topics and inform you how you are
00:28:52
actually helping and can continue
00:28:54
helping these projects carry forward.
00:28:56
So, if you've ever been curious about
00:28:57
the business of my blog and podcast, or
00:28:59
if you're curious about my day job in
00:29:01
wealth management, please check out
00:29:02
episode 78 and let me know what you
00:29:04
think. And with that, I now want to
00:29:06
bring Don McDonald into the episode.
00:29:07
Like I said earlier, Don is a longtime
00:29:09
financial radio host, author, and
00:29:11
educator known for his non-nonsense
00:29:13
approach to investing in personal
00:29:14
finance. As a co-host of Talking Real
00:29:16
Money, Don helps listeners navigate the
00:29:18
complexities of markets, emphasizing
00:29:20
evidence-based investing and avoiding
00:29:22
highcost financial products. With
00:29:24
decades of experience, Don is a strong
00:29:26
advocate for fiduciary advice and
00:29:28
simplifying money management for
00:29:29
everyday investors.
00:29:36
Don, thank you for joining us today. And
00:29:38
for those unfamiliar, I think it's
00:29:40
important we we set a little foundation
00:29:42
today and we define this broad category
00:29:44
of investment products that we're going
00:29:46
to spend the rest of the conversation
00:29:47
talking about annuities. And then so
00:29:50
right a broad
00:29:52
definition sorry I'm sorry I'm allergic
00:29:55
to the term.
00:29:57
It causes my eyes to water, my nose to
00:29:59
run cuz to me and and no pun intended or
00:30:02
maybe there is a pun intended. It's like
00:30:04
the word snake, you know. Are we talking
00:30:06
about a one- foot garden snake that kind
00:30:08
of helps out and eats some bugs or is it
00:30:10
a 15 foot anaconda? Both kinds of snakes
00:30:13
scare my wife to death. We just had a
00:30:15
rat snake in the uh or a black racer in
00:30:18
our yard in Florida and I mean she's
00:30:20
freaking out. I said, "Honey, it's
00:30:21
fine." She goes, "But look, it's shaking
00:30:23
its tail." I said, "That's because it
00:30:25
wants to scare you, but it's not
00:30:28
poisonous." Most annuities I I got I
00:30:31
they're not life-threatening, but they
00:30:33
are wealth threatening. Wealth
00:30:36
threatening. So just really broadly when
00:30:38
someone hears the term annuity, what
00:30:41
should they be thinking from not whether
00:30:42
good or bad? I mean, we'll get to that
00:30:44
part, but just what exactly logistically
00:30:46
is an annuity? Oh, darn it. I I was
00:30:49
going to say sales pitch. If you want,
00:30:51
what should you be thinking? Sales
00:30:52
pitch. There's a there's a saying in the
00:30:55
financial business that annuities are
00:30:58
not bought, they are sold. No, I have
00:31:01
never met anybody going I think I need
00:31:03
to buy an annuity. But let's define the
00:31:06
different types of annuities. Great
00:31:08
because there are there is a universe of
00:31:10
them and I'm going to cover the broad
00:31:13
not the granular because the insurance
00:31:15
industry is massively creative when it
00:31:18
comes to developing variations on the
00:31:21
product theme. But the primary annuity,
00:31:23
the one that most people think about
00:31:25
when they think of annuities, is the
00:31:27
fixed annuity, which is a an annuity
00:31:30
that is a contract with an insurance
00:31:32
company. You give them a chunk of money,
00:31:35
they say, "We're going to give you an
00:31:36
interest rate of this over x amount of
00:31:39
time." That's how it works. You give
00:31:41
them the money, they take the money and
00:31:43
invest it in ways that can make more
00:31:45
money because of their economics of
00:31:47
scale. And they give you a portion of
00:31:48
that and they take a profit out of the
00:31:50
middle. And a person selling that
00:31:53
annuity to you
00:31:56
99.999999% of the time is going to
00:31:58
collect a pretty sizable commission for
00:32:01
selling that to you. Now that is a
00:32:03
non-disclosable commission because of
00:32:05
the lack of regulation over the
00:32:07
insurance industry. It is pathetic
00:32:09
regulation. That's type number one. Type
00:32:12
number two, which is very popular with
00:32:15
seniors, basically it's what a pension
00:32:17
is. It's an income annuity. And a
00:32:20
pension is basically your company goes
00:32:22
out and buys or puts up the money to pay
00:32:27
all of its retirees a set amount of
00:32:30
money every month for the rest of their
00:32:31
life. It's called an immediate annuity,
00:32:34
which means it immediately starts paying
00:32:36
you income. Here's the downside. You get
00:32:39
and you're looking at the number going,
00:32:40
"Well, wait, that's great. That's 7% per
00:32:42
year. That's more than I can get on a
00:32:44
CD." Well, wait. There's a catch. You
00:32:48
gave them all your money. You can never
00:32:51
get it back. But what if I But what if I
00:32:53
die tomorrow? Don, you're saying I
00:32:55
can't. Sorry. So, got it. Red luck. The
00:32:59
money is the insurance companies. Unless
00:33:01
you got a writer, which was a joint life
00:33:03
or some sort of certain term over which
00:33:06
that annuity will be paid to your
00:33:08
beneficiaries, you're out of luck.
00:33:10
That's the gamble. And guess who wins
00:33:13
this gamble? Not me. No. Well, the
00:33:16
insurance companies, they have to. It's
00:33:19
like a casino. If more of the players
00:33:22
won than the house one, well, that
00:33:24
casino is going to go belly up like
00:33:27
those of a major real estate developer
00:33:29
many years ago, whose name I will not
00:33:31
mention. So, so let's dive into really
00:33:34
quick while we're still defining this
00:33:35
down. Let's dive into So, there's this
00:33:38
bad reputation. Some of the specific
00:33:40
fees or commissions, timelines, and
00:33:42
contracts. You said it's it's
00:33:43
non-disclosable, but still I know you
00:33:45
know some of what's going on under the
00:33:47
Oh, yeah. Yeah. Yeah. Let me just grab
00:33:48
the last two big big categories. I just
00:33:51
The next one is a variable annuity. Now,
00:33:53
you're going to find this in almost
00:33:54
every 403b plan or 457 plan in America
00:33:57
because the insurance company has
00:33:59
insurance companies have swooped in and
00:34:01
really captured this market. And a uh
00:34:04
variable annuity is an annuity wrapper
00:34:07
which is by law it gives you tax
00:34:09
deferral around a portfolio of mutual
00:34:12
funds. So you pick the funds within the
00:34:14
annuity. The reason why it makes no
00:34:16
sense for a 403b or a 457 is the fact
00:34:21
that you can't get tax deferral twice.
00:34:24
You only get it once. And the 403b and
00:34:26
457s and IAS and all those are already
00:34:28
tax advantage. What it does is it
00:34:31
inserts another level of layers that
00:34:33
decrease your return. And then finally,
00:34:36
the industry's latest horrible lie is
00:34:39
the indexed annuity or the equity
00:34:41
indexed annuity or variations on that
00:34:43
theme. There also some index life. And
00:34:45
these are products where they tell you
00:34:47
you can get the return of the stock
00:34:49
market with none of the risk, which in
00:34:52
itself is a blatant lie. And you'll
00:34:54
never see that written down. They'll say
00:34:57
stock market like returns with none of
00:34:59
the risk. They'll speak the words in
00:35:01
their steak dinners telling you that
00:35:03
this is the greatest thing. So, let's
00:35:05
talk about commissions. Yeah, let's talk
00:35:07
about them. Commissions on very vanilla,
00:35:11
cheap annuities can be 1 or 2% at the
00:35:13
lowest end. They can be very, very low.
00:35:16
At the highest end, I've seen them as
00:35:18
high as 12% on indexed annuities. Your
00:35:21
spread's going to be somewhere in there.
00:35:23
But the problem is they're not going to
00:35:26
tell you. If you go to one of these free
00:35:27
steak dinners, and this is where index
00:35:29
annuities are pitched all the time, why
00:35:31
would they pay for a Ruth's Chris filet
00:35:34
minan, put it on your plate if they were
00:35:37
doing what was right for you? Why would
00:35:40
they do that? And I just love you
00:35:42
people. I just want to give you a steak.
00:35:44
No, they're doing it because their
00:35:45
commission's probably eight or 10% on
00:35:48
this thing. And if they can just get a
00:35:49
couple of you to buy it, you've paid for
00:35:51
the dinner and the Lexus. So on a, you
00:35:54
know, if I'm a retiree and I'm thinking
00:35:56
about taking my my $300,000 that I've
00:36:00
saved in a 401k, rolling it over to an
00:36:02
IRA, and then buying one of these
00:36:04
annuities because a stake dinner
00:36:06
salesperson told me so. An 8% commission
00:36:09
there is what,
00:36:10
$24,000 on 300? Is that So that's the
00:36:13
salesperson's incentive to push. You got
00:36:15
it. You have it. And it's so funny
00:36:18
because I run into a lot of these. In
00:36:21
fact, many of them have radio shows. For
00:36:22
some reason, these guys have a lot of
00:36:24
radio shows. The reason being, again,
00:36:26
the profit margins. The margins are
00:36:28
great. And they say they're a
00:36:31
fiduciary. We're acting in your best
00:36:34
interests. And some of them are CFPs.
00:36:36
How the the Certified Financial Planner
00:36:38
board lets them get away with this is
00:36:40
baffling. I've reported some of them to
00:36:42
the CFP board. Never received a response
00:36:45
from them. Never ever because they're
00:36:47
protecting their own. But these guys
00:36:49
will say they're a fiduciary and then
00:36:51
they'll sell you an index. I have a
00:36:54
story about this, Don. There's someone I
00:36:55
know in person here who dropped that
00:36:57
line on me. I mean, he was trying to
00:36:59
pitch me on why I was going about my
00:37:01
career. You're an investment advisor
00:37:03
rep, right? You're an AR, correct? And
00:37:05
he tried to sell you. So, he tried to
00:37:08
pitch me that I wasn't going about my
00:37:09
business the right way. And he said,
00:37:11
"Well, Jesse, you have seven CFPs on
00:37:13
staff and you guys don't sell
00:37:14
annuities." Like, I was a crazy person.
00:37:17
And I said, "You're a CFP who's supposed
00:37:19
to be acting as a fiduciary, and you
00:37:21
do." Now, here's something I learned.
00:37:23
The CFP, to obtain the CFP, you have to
00:37:26
take an ethical oath to act as a
00:37:29
fiduciary. You do not have to take a
00:37:31
legal oath. I know. I know. It's an
00:37:33
ethical, it is not a legal oath. The
00:37:36
only legal one is the SEC's
00:37:38
requirements. Correct. And that's where
00:37:40
you and I know do like my firm, right?
00:37:42
And we were talking offline the work
00:37:43
that that you've been doing. We have to
00:37:45
take a legal obligation to act as a
00:37:47
fiduciary. And if we don't work in a
00:37:49
client's best interest, sue us. That's
00:37:52
something that these annuity pushers
00:37:54
that you were just talking about, they
00:37:55
they don't face that threat. When legal
00:37:57
suit comes, that will change your
00:37:59
behavior to make sure that you really
00:38:00
are acting in the best interest of
00:38:02
clients. Problem is though, the lobby
00:38:04
for the insurance industry and by the
00:38:06
way for the broker dealer industry is so
00:38:08
strong, so powerful, so wellunded that
00:38:11
as a matter I'll give a story. several
00:38:14
years ago back around the time when uh
00:38:16
started talking real money like 15 or 16
00:38:19
years I don't remember the exact time
00:38:20
frame index annuities were just coming
00:38:22
into their own and the securities and
00:38:24
exchange commission had proposed
00:38:26
regulating them as a security because
00:38:29
they sell them as if they're the stock
00:38:31
market right you're going to get the
00:38:32
return of the stock market with none of
00:38:34
the risk so the SEC said we really need
00:38:37
to regulate these as investments not as
00:38:40
insurance policies well my understanding
00:38:43
is that the insurance industry spent a
00:38:46
couple hundred million dollars lobbying
00:38:48
Congress to keep the control of the
00:38:51
regulation of those products under the
00:38:54
states, not under the federal
00:38:56
government, which allowed them because
00:38:59
have you ever looked at the makeup? Most
00:39:00
Now you're in New York, right? Correct.
00:39:02
Yeah. You actually have a pretty strong
00:39:05
state insurance commission. Correct.
00:39:08
Some states though, if you look, you'll
00:39:10
see that they're either former insurance
00:39:13
company executives or if you look
00:39:16
forward down the road, you find that
00:39:17
many come from the leave the commission,
00:39:19
retire, and go to work for a big
00:39:21
insurance company. H I wonder who they
00:39:26
want to help. So, so that's that's a
00:39:28
really good little side point right
00:39:29
there. The annuity industry doesn't have
00:39:31
much federal oversight. Instead, there's
00:39:33
a state-by-state insurance oversight.
00:39:36
Correct. In that in essence there is no
00:39:38
federal oversight of the insurance. The
00:39:40
only reason there's some federal
00:39:41
oversight of variable annuities is
00:39:44
because of the fact they have a security
00:39:48
within or securities within them in the
00:39:50
form of mutual funds. Here's a quick ad
00:39:53
and then we'll get back to the show.
00:39:55
Every week I send a quick free email to
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no strings attached subscription at
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bestinterest.blog. So, real quick, we
00:40:44
already kind of got into some of the
00:40:46
conversation about who the people are
00:40:48
who are selling annuities, Don. And I
00:40:50
think one of my challenges, I just had a
00:40:52
conversation last couple weeks ago with
00:40:54
a woman here at work. her adviser, her
00:40:56
current adviser, she dearly enjoys
00:40:59
spending time with her current adviser
00:41:01
and the company and the conversations
00:41:03
they have. And she sees her adviser as a
00:41:05
very good person. Her adviser also has
00:41:08
put this woman in $1.5 million worth of
00:41:10
annuities. And to me, I I think to
00:41:12
myself, there are a lot of really good
00:41:14
people in this world who maybe I don't
00:41:16
agree with exactly what they do for
00:41:18
work. And so from your point of view, I
00:41:20
mean, you've been to the steak dinners,
00:41:21
right? Oh, yeah. I love going to the
00:41:24
steak dinners. My wife won't let me go
00:41:27
anymore because she has to go. You have
00:41:29
to take your spouse and I embarrass her
00:41:32
and I make them mad. I have ruined many
00:41:35
a steak dinner and felt very good about
00:41:38
it because and I told her this when she
00:41:40
said, "Oh, look at this one. This one's
00:41:41
this is a Roose Chris. Let's go." In
00:41:43
fact, it was yesterday. And I went,
00:41:45
"Okay." She goes, "No, you can't say
00:41:46
anything." I said, "I can't not say
00:41:48
anything." I said, ' Because I'm sitting
00:41:50
in a room with a bunch of very nice
00:41:52
people, albeit chintzy, and you know,
00:41:54
they're looking for cheap dinners, but
00:41:56
I'm sitting in a room with a bunch of
00:41:57
nice people, and can I with a clear
00:42:00
conscience allow this incompetent nink
00:42:04
poop on up at the front of the room to
00:42:06
sell them such a horrible, misleading
00:42:09
product? Can I just can I do that? Oh,
00:42:12
by the way, it's not just me who thinks
00:42:14
this about indexed annuities. FINRA has
00:42:16
an investor alert about them that
00:42:18
they've had up for years about the
00:42:21
understandings that are promulgated by
00:42:23
the industry. They want you to
00:42:24
misunderstand them. And by the way, if
00:42:26
you're ever sold one of these, ask for
00:42:27
the disclosure document. When you get
00:42:29
it, you'll realize just by holding it in
00:42:32
your hand why this is not a good
00:42:34
investment because it's so big cuz you
00:42:36
can't carry it. You can't you won't read
00:42:39
it. But help for the listeners, Don, I
00:42:41
mean, help them understand from your
00:42:44
experience. I mean, I'm I'm I'm
00:42:45
genuinely curious. Are the individual
00:42:47
people, the humans who are doing the
00:42:49
selling, are these just people who have
00:42:51
just terrible misaligned incentives, are
00:42:54
a good person? Are they in a bad spot?
00:42:56
Is it just deliberate ignorance,
00:42:58
unknowing? They they're genuinely
00:43:00
convinced they're doing the right thing,
00:43:02
or do they just deep down inside they
00:43:03
know they're screwing you and they're
00:43:05
okay with screwing you?
00:43:06
I think the answer is it runs the gamut
00:43:10
of humanity from outright crooks and
00:43:13
those are the ones who have the radio
00:43:15
shows that they pay for in major markets
00:43:18
and come right out and lie on the radio.
00:43:21
They're they know what they're doing,
00:43:22
particularly those that are CFPs.
00:43:24
They've decided that they're going to
00:43:25
get a lot more butter on their bread
00:43:27
with a an indexed annuity than by a
00:43:30
feebased or a fee only financial
00:43:32
planning practice. So, those are the the
00:43:34
worst of the worst. Okay, I went to one
00:43:37
just down the street from my house. The
00:43:39
guys were middle-aged. You could tell by
00:43:43
the way they spoke that they weren't the
00:43:45
brightest bulbs in the box. And one guy
00:43:49
was actually wearing a cheap polyester
00:43:52
suit. And I mean, it was the cheap
00:43:55
polyester if it was kind of it was
00:43:56
almost a dressy pants suit, a tracksuit.
00:43:59
It was just so bad. One guy had his
00:44:02
shirt unbuttoned all the way down with
00:44:04
gold chains. Great. It's like mobster.
00:44:07
You're thinking mobster. This guy's a
00:44:09
mobster. And this was one of them where
00:44:11
I asked questions. They put a chart up
00:44:15
in front of the room on a on an easel.
00:44:17
It's a p a cardboard, you know, done
00:44:19
kinko's chart. Mhm. And it shows the
00:44:21
stock market since like
00:44:24
1929. And this stock market, they show
00:44:26
you the stock market since 1929. I think
00:44:29
they used the Dow or something. Maybe it
00:44:31
was the S&P. No, cuz the S&P didn't
00:44:33
exist back then. Anyway, they show you
00:44:35
this horrible chart and tell you how
00:44:37
over decades if you invested in the
00:44:39
stock market in 1929, you didn't make
00:44:42
any money. Well, I pull out my phone, I
00:44:44
look at the numbers, I go, "Wait, excuse
00:44:47
me. Did you include dividends in that?"
00:44:50
Oh, I dividends. Uh, well, I'm not I
00:44:54
don't know. I said, "I don't think that
00:44:55
includes dividends." I said, 'I'm pretty
00:44:57
sure if you include dividends, you made
00:45:00
money after about 5 years. I said, 'N
00:45:02
no, you know, I've got Anyway, so he
00:45:04
shut me up. Oh, well, we'll just let's
00:45:05
move on. We're going to Then at the end,
00:45:07
I said, so what's the cost of this?
00:45:11
There's no cost. I said, there's no
00:45:13
cost. Well, how do you make money? The
00:45:17
insurance company pays me. I said, ah,
00:45:19
so the insurance company pays you and
00:45:21
they don't take what they pay you out of
00:45:23
the money you raise. No. I said, "Sir,
00:45:26
that's now that is now a lie." Right.
00:45:28
Right. Because every penny they pay you
00:45:30
has to come out of the money they take
00:45:32
from clients. So, it's a lie. The
00:45:34
business is based on lies. Lie after lie
00:45:38
after lie after lie. But the thing is is
00:45:40
they're spoken lies. So, you can't
00:45:42
really nail them on it as long as they
00:45:45
gave you even a link to that ponderous
00:45:49
multiundpage disclosure document. Right?
00:45:51
The truth is in writing and the truth is
00:45:53
in writing in this really hard to
00:45:55
untangle document. But the idea is that
00:45:57
the document that you end up signing as
00:45:59
an annuity purchaser technically that
00:46:02
document has all the truth in there and
00:46:04
it says you read the document. It's well
00:46:07
think about it. When was the last time
00:46:08
you downloaded software and read the end
00:46:11
user agreement? Have you ever done it
00:46:14
ever in your life? I haven't. Never. Not
00:46:16
once. And I'm an advocate for people,
00:46:18
but I have to trust that they're not
00:46:21
going to shaft me, but you can't do that
00:46:24
with insurance salespeople. I I want to
00:46:27
start arming our audience right now.
00:46:30
Some of them are approaching retirement
00:46:32
age. They're they're on the AP list, and
00:46:34
that means that the steak dinner
00:46:36
postcards are starting to show up in the
00:46:38
mail. Don, so what are some of the most
00:46:41
misleading sales pitches? I mean, you've
00:46:42
already talked on some of them. What are
00:46:44
some of the sales pitches that we need
00:46:45
to arm ourselves against? How do the
00:46:47
sales people take advantage of maybe
00:46:48
some of our fears to then sell to us?
00:46:51
How do the guarantees get
00:46:53
misrepresented? What are the red flags?
00:46:55
Take it from here. Well, there's no
00:46:56
greater fear for an investor,
00:46:59
particularly a senior investor like I
00:47:01
am, than the prospect of losing a
00:47:05
substantial amount of what you have now
00:47:08
saved 40 years to build. You don't want
00:47:12
to lose it. And that's the biggest one.
00:47:14
And I think they exploit this fear of
00:47:16
losing it to a horrible downturn in the
00:47:18
market. But if they told the truth, then
00:47:22
you wouldn't be as afraid because the
00:47:25
reality is there aren't a lot of
00:47:29
dramatic declines in the market. In
00:47:32
fact, there aren't any that were
00:47:33
permanent. Never has there been a
00:47:36
downturn in the market. Even 2008, which
00:47:38
was the worst one we ever saw for
00:47:39
stocks. And having said that, then
00:47:42
what's the solution to avoid that bad
00:47:44
feeling? Because if you ask any of your
00:47:46
clients, any person on the street, you
00:47:48
got a million dollars and I take away
00:47:50
500,000 of it. I'm going to just take it
00:47:52
right now from you. I'm going to walk
00:47:54
down the street. Now, before I go, I
00:47:56
promise I'm giving it back. Well, at
00:47:57
least I promise I've always given it
00:47:59
back in the past. Pretty sure I'm going
00:48:01
to do it again. You know, I mean, I
00:48:03
could get hit by a bus, but if I don't,
00:48:05
I'm giving you the money back in a year.
00:48:07
Giving it back. Are you okay with me
00:48:09
taking it away and bringing it back in a
00:48:11
year? Or maybe two. Can't promise
00:48:13
anything. Most people will say, "Oh, no.
00:48:17
Right. You can't have it." Well, then
00:48:19
that's where what we do comes into play.
00:48:23
And that is creating the right plan for
00:48:26
every individual's
00:48:28
individual risk profile and risk need.
00:48:33
It's a combination. You know, how much
00:48:35
risk can you take? How much risk do you
00:48:36
need to take? So they're going to
00:48:38
they're going to exploit that. They're
00:48:39
going to exploit. A lot of people hate
00:48:42
paying taxes. So they're going to talk
00:48:43
about the tax deferral aspects of
00:48:45
annuities that they're going to give you
00:48:47
tax deferral. Well, the thing let's use
00:48:49
a variable annuity for example. You
00:48:50
they're saying, okay, you got all this
00:48:52
money in this taxable account. It's not
00:48:53
in your IRA, it's not your 401k, it's in
00:48:55
your taxable account. Why do you have
00:48:57
that in a taxable account? When you as
00:48:59
you as that money is making money,
00:49:00
you're paying taxes on it. Let's put it
00:49:02
in one of these variable annuities where
00:49:03
we'll shelter it from taxes. you won't
00:49:05
have to pay the taxes till you take it
00:49:06
out. They neglect to mention that if you
00:49:09
have it in a bunch of if part of your
00:49:11
portfolios in equities and you have it
00:49:12
in ETFs, you will probably not
00:49:15
experience any taxable capital gains
00:49:17
until you take the money out. And then
00:49:19
when you pay taxes on that, you will pay
00:49:22
it at a capital gains rate, which right
00:49:24
now is dramatically lower than the
00:49:25
income rate. If you take when you take
00:49:28
money out of your annuity, you will pay
00:49:30
taxes at your income rate. It's a bad
00:49:33
thing. And the deferrals is not very
00:49:35
valuable. It's really not very valuable.
00:49:37
As a matter of fact, it doesn't even
00:49:39
exist in a tax deferred retirement
00:49:41
account. So Betsy is listening right now
00:49:45
and she owns an annuity, maybe even more
00:49:47
than one. Cuz I don't know about you,
00:49:49
they tend to come in like bunches.
00:49:51
People will come in with eight unique
00:49:52
annuity statements. So maybe you can
00:49:54
explain why that's the case. Dude, you
00:49:56
nailed it with the story of the woman
00:49:59
who believes this person is so nice.
00:50:04
Because what is the common denominator
00:50:07
for successful salespeople? Likability.
00:50:11
They are so nice. A great car salesman,
00:50:15
woman, so nice. Insurance so nice.
00:50:18
Whatever it is they're selling,
00:50:19
particularly if it's on commission, man,
00:50:21
you got to be nice or or you don't live
00:50:23
right. So, what the problem is, the
00:50:26
reason they're getting sold it is
00:50:28
because the person was so nice. Yeah. To
00:50:31
expand on that story a little bit, this
00:50:33
woman sat in our office. She's been
00:50:36
working with her adviser. I'll call her
00:50:37
adviser Sharon. She's been working with
00:50:39
Sharon for 20 years. And so I asked the
00:50:41
potential the woman sitting across from
00:50:43
me with all the annuities. I said, "When
00:50:45
was the last time Sharon discussed fees
00:50:47
with you?" And the answer was, "Oh, I
00:50:50
don't think we've ever I don't think
00:50:52
we've ever talked about fees." I mean,
00:50:54
that should paint a picture for all the
00:50:56
listeners right now. It's been 20 years
00:50:58
and they've never once discussed fees.
00:51:01
The fees are so well hidden they don't
00:51:04
have to. It's a little scary. I remember
00:51:07
cuz I'm old back when I was a broker
00:51:09
back in the days when Dean Witter was
00:51:11
sitting in Sears Robucking Company
00:51:13
stores and then I got religion and got
00:51:15
the heck out of it and got into radio.
00:51:17
Being told by Dean Witter at the time
00:51:19
they had just no load funds were
00:51:22
suddenly coming into their own. This was
00:51:24
in the mid80s, mid to late 80s. No load
00:51:28
funds were coming into their own and it
00:51:30
was really starting to hurt our sales of
00:51:33
full commission funds. Our commissions
00:51:36
generally ran 5.75% on a mutual fund. So
00:51:40
I don't know if it was Dean Witter or
00:51:41
who came up with it, but it was a brand
00:51:43
new idea that they just got approved by
00:51:45
the Securities and Exchange Commission.
00:51:47
They got 12b1 fees approved so that they
00:51:50
could create and roll out what I call
00:51:52
and Christopher Cox of the SEC also
00:51:54
called them this liar load funds or
00:51:57
sales loads in drag. They never put any
00:51:59
of this in writing, but they would tell
00:52:01
us. When somebody, you call somebody,
00:52:03
don't you don't talk about commission.
00:52:04
But if they ask, you can say, "Oh, no,
00:52:07
no, no. You don't pay a load on this.
00:52:08
There's no commission. There's no
00:52:09
commission upfront. There's no front
00:52:11
commission." You would say really
00:52:12
quietly. And you because you knew nobody
00:52:14
was going to read the perspectives and
00:52:16
see that the commission was coming
00:52:17
through this new 12b1 fee at 1% per year
00:52:20
for every year they had the fund. And if
00:52:22
they got out early, that's okay. There
00:52:24
was a surrender fee. So, they got paid
00:52:26
back the commission they paid to me. So
00:52:28
this is what the insurance industry
00:52:29
does. They hide they obfuscate the fees.
00:52:33
They you deemphasize any of the
00:52:35
negatives and you emphasize only the
00:52:38
positives. Positives being decent
00:52:41
return, no risk or no taxes. What's
00:52:44
Betsy to do? Betsy owns eight annuities
00:52:46
right now and she's listening to us and
00:52:48
she all of a sudden feels like she's
00:52:50
been dealt a raw deal. What can she do
00:52:53
about her situation? Is Betsy in or
00:52:56
approaching retirement? probably is,
00:52:58
right? Let's say yes, because she's
00:52:59
gotten eight annuities, so she's
00:53:01
probably got a fair chunk of change. So,
00:53:03
we're talking she's got like probably a
00:53:04
million bucks, right? Exactly. If she's
00:53:07
heading into retirement or in it, this
00:53:10
is when you need desperately need true
00:53:15
financial planning. And anyone who sells
00:53:18
an annuity in my book is not a
00:53:22
comprehensive financial 100% fiduciary
00:53:25
always taking care of your best
00:53:26
interests advisor because they can't be.
00:53:29
If you sell someone an annuity, you have
00:53:31
to know that most of the time, unless a
00:53:34
series of very special circumstances
00:53:36
apply, that is not a suggestion that's
00:53:40
in a client's best interest. The only
00:53:42
the only instance where it might make
00:53:43
sense is if somebody must have a set
00:53:45
income for the rest of their life. They
00:53:47
have to have it. Their peace of mind is
00:53:50
so much higher than their need for
00:53:52
return. Anyway, having said that, what I
00:53:55
would suggest every time is that
00:53:58
somebody go that you seek out someone
00:54:01
like you, someone like the people at my
00:54:03
firm, someone like the people at at a
00:54:06
list. I mean, I got a list of them on
00:54:07
talkingrealmoney.com of firms that I
00:54:10
believe always act as a fiduciary. Not
00:54:12
just us, not just you guys. There are a
00:54:14
lot of them. Problem is, they're hard to
00:54:16
find, right? Because 100% fiduciary
00:54:19
firms tend not to advertise very much
00:54:23
because generally speaking, they're
00:54:25
doing pretty well, because they're
00:54:28
honest. But you need a planner. If
00:54:31
nothing else, you need to get a
00:54:32
financial plan. Just a financial plan.
00:54:34
Now, that's going to cost you several
00:54:35
thousand dollar. It is not a cheap
00:54:38
document because it entails a lot of
00:54:40
work with you and your adviser and your
00:54:42
planner and then your planner and their
00:54:44
team to create the plan. It is a
00:54:46
comprehensive document, but if it's done
00:54:48
by a fiduciary, it's going to be in your
00:54:50
best interest if it's done by a 100%
00:54:52
fiduciary. So, at least get a plan. If
00:54:55
not, start working with an adviser
00:54:57
because even though you go, "Oh, what's
00:54:59
1% per year or 75 basis points per year
00:55:02
or whatever it is, you just paid 5 6 7 8
00:55:08
9% for those annuities you got into. And
00:55:12
generally the insurance company's I
00:55:14
guarantee making more money than you are
00:55:17
in aggregate." And so I think Don, you
00:55:19
know, second question might be a very
00:55:20
similar answer, but Betsy's brother Jim
00:55:22
is also listening right now. Hey Jim,
00:55:24
nice to talk to you. He loves the idea
00:55:27
of guaranteed income as many of us do.
00:55:29
It's understandable, right? That appeal
00:55:31
and everybody's retirement, whether it's
00:55:34
social security, pension, bonds, they
00:55:36
have some form of guaranteed or fixed
00:55:37
income in there. So, he's been thinking
00:55:39
about an annuity, too. Maybe he's
00:55:41
thinking about going to the steak dinner
00:55:42
tonight. What does he need to know
00:55:44
before he, you know, dumps the A1 sauce
00:55:46
on his steak? Buy the steak. just go
00:55:48
ahead and buy the steak and skip the
00:55:50
dinner because these people are really
00:55:52
good at what they do. There's a
00:55:55
human thing we have. I don't know what
00:55:58
the psychological terminology is, but
00:56:01
it's a tendency to reciprocate. Oh,
00:56:04
yeah. We want to be reciprocal. Yeah.
00:56:06
It's just part of the social fabric of
00:56:07
our brain. You got this free dinner and
00:56:10
you feel like, okay, I should take the
00:56:12
meeting. Because that's what they're
00:56:13
there to get you to do. They're there to
00:56:15
get you to take the meeting. Here's what
00:56:17
happened. They hold dessert until you
00:56:19
give them the meeting. And they've even
00:56:21
said that. One of the on one of them I
00:56:23
went to, they said, "Well, yeah, you
00:56:25
we're not going to we're not going to
00:56:26
give you dessert until you sign up for
00:56:27
one of these meetings because if you
00:56:29
sign up for one of these meetings,
00:56:30
you're really going to change your
00:56:31
life." No, no, no, no, no, no. And and
00:56:33
if it's that if the sales pitch is that
00:56:36
dominant in the dinner, imagine what
00:56:38
they're going to do to you in their
00:56:40
office. Just pay for the steak. I love
00:56:44
it, Don. I love it. So, let's talk about
00:56:47
where our listeners can start tuning
00:56:49
into your show. How long's it been? Give
00:56:52
us a quick history. What's it been, Don?
00:56:54
30 years. I have been doing a financial
00:56:57
talk show of some kind. Before podcast,
00:57:00
I was on 90 stations across the country
00:57:03
with Business Radio Network. I did a
00:57:06
national talk show which went from
00:57:09
network to network to network as radio
00:57:11
became paytoplay. radio is now in the
00:57:14
financial end of radio. It's almost
00:57:16
entirely paytoplay. And then I started
00:57:18
doing podcasts with Paul Marman of
00:57:20
Marman Capital, who's well known
00:57:22
nationwide. I've worked with Paul for
00:57:24
many, many years. Paul's the one who
00:57:25
taught me all about dimensional funds
00:57:26
and Devontis funds and this
00:57:28
evidence-based approach to investing,
00:57:30
which I just adore. Back in 2009, Tom
00:57:34
and I, who's my co-host and
00:57:35
partner, Tom and I worked for Marman
00:57:37
Capital or Maramman, whatever it was
00:57:40
called at the time, and funny thing
00:57:42
happened. And we were both in the
00:57:43
marketing department. Okay. Funny thing
00:57:45
happened. They called it 2008. Ooh. What
00:57:49
did firms do in 2008 when the market
00:57:53
dropped by about half? Probably cut some
00:57:56
staff. Got rid of
00:57:58
marketing. So we got laid off. And so in
00:58:01
2009, we got together and we went maybe
00:58:05
we should start an investment advisory
00:58:07
firm based on what we're good at, which
00:58:10
is educating people. base it on
00:58:12
education, don't base it on sales. We
00:58:15
don't want to push sales. And so that's
00:58:17
what we did. We started a firm called
00:58:19
Vest and the podcast Talking Real Money
00:58:21
almost simultaneously. We're still doing
00:58:23
it. If your podcast is there, just type
00:58:26
in Talking Real Money in the search bar
00:58:28
and you'll find us right there. We're
00:58:30
not as popular as Stacking Benjamins.
00:58:33
Dank joke sali. Well, Don McDonald,
00:58:36
thank you for stopping by Personal
00:58:38
Finance for Long-Term Investors. My
00:58:40
pleasure. Thanks for tuning in to this
00:58:42
episode of Personal Finance for
00:58:44
Long-Term Investors. If you have a
00:58:46
question for Jesse to answer on a future
00:58:48
episode, send him an email over at his
00:58:50
blog, The Best Interest. His email
00:58:52
address is
00:58:54
[email protected]. Again,
00:58:56
that's
00:58:58
jessevestinterest.blog. Did you enjoy
00:59:00
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00:59:02
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00:59:04
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00:59:06
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00:59:08
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00:59:10
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00:59:12
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00:59:15
for Long-Term Investors is a personal
00:59:17
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00:59:19
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00:59:21
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00:59:22
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00:59:24
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