Paul Winkler: Back here on “The Investor Coaching Show,” Paul Winkler along with Ira Work and talking about the world of money and investing.
So one of the new guys in town, one of our new guys in here, Scott—Scott is studying for his Series 65.
And so you often hear me talk about that we have degreed planners around here, all either chartered financial consultants or certified financial planners.
To call yourself a financial advisor, you don’t have to have any of those degrees, which I lament and whine about.
So Ira got some pages from the study material. So are you ready for a—I want you to comment on some of this stuff.
Ira Work: Okay.
Paul Winkler: Okay? So you go and get a Series 65, and you can call yourself a registered investment advisor representative.
Ira Work: Correct.
Paul Winkler: And go and actually represent and talk to clients and give advice and all of that stuff.
So they have this study material with investor recommendations, the chapter for investor recommendations.
Recommendations From Study Material for Advisors
Our first investor is a divorced, 71-year-old man. Recently sold a small landscaping business for $400,000, after capital gains taxes.
So this is a scenario in here, in the study material.
Although he loved to work 12-hour days for decades, those days are behind him now.
This customer does not trust the stock market and remembers that his father lost money in bonds back in the late 1970s.
And that would be because interest rates going up caused bond prices to go down. That’s why he would remember that; that happened back then.
This $400,000 is the money your customer plans to live on as a supplement to Social Security.
His house has a mortgage balance of $25,000. Living expenses: reasonable, although he’ll need a new automobile in the next few years and a roof replacement and new water heater for his 30-year-old house.
Investment objectives: capital preservation, income, high liquidity needs. Time horizon: long-term. Risk tolerance: low.
The investor is clearly not interested in risking loss of his investment and principal. So if we make aggressive recommendations to him, it’s not just a bad idea; it could be potential arbitration or civil court proceedings.
So basically, what do they recommend? Ready for this?
Now, this is a person that’s 71, could have a 25–30 year time horizon.
Ira Work: Mm-hmm.
Paul Winkler: Somewhere in that neighborhood.
T-bills, short-term T-notes, investment-grade bonds.
Bond funds with shorter maturities, which is literally—shorter maturities, so you got low interest rate. Super, super low interest rate.
Investment grade, so you’re lending money to companies that are borrowing out of convenience, not borrowing because they need money. So the interest rates are going to be exceedingly low.
And money market mutual funds.
Is the Advice Helpful?
So you have a person that has a 25–year time horizon.
Go. Now what are your thoughts?
Ira Work: Well, my first initial thought was, the reason he was probably working 12-hour days was because he wasn’t happily married; hence, he is now divorced.
Paul Winkler: Now leave that out of this, will you? This is about investing here.
Ira Work: Well, I mean, no. It’s getting to the investment part.
Paul Winkler: Okay.
Ira Work: He didn’t have time, working 12-hour days, to get a little bit of financial education. So the first thing—
Paul Winkler: But he does now. So let’s just say he’s got the extra time right now.
Ira Work: Right. So the first thing I would do is sit down with him and help bring him through some education about-—
Paul Winkler: So what does he need to know?
Ira Work: Well, he needs to know that, number one, by having all these short-term, fixed-income—unless he doesn’t have any expenses whatsoever, which is very hard to believe because if he owns a house, he’s got property taxes. He’s got insurance.
If he owns a car, he’s got insurance.
Paul Winkler: Good point.
Ira Work: Those things are going to increase over the years.
Paul Winkler: And food.
Ira Work: He’s got to eat.
Paul Winkler: And a telephone bill.
Ira Work: Yeah.
Paul Winkler: And cable.
Ira Work: He doesn’t have to have a phone bill. I mean, he could be a hermit.
Paul Winkler: A cell phone.
Ira Work: He could be a hermit.
Paul Winkler: Well, yeah.
Ira Work: But you do need heat, if you’re in Tennessee. You do need heat in the winter.
You can go without air conditioning in the summer, but you do need heat in the winter.
But your car insurance, your homeowners insurance, your taxes: those are going to increase.
Paul Winkler: Mm-hmm.
Ira Work: The low-yielding, fixed-income, and money market account, as you had said, pay really very little, almost nothing.
So he’s not going to be able to maintain purchasing power for the little bit of stuff that he may do.
Paul Winkler: No. At a 1% interest rate or 2% interest rate—
Ira Work: Right. Well, and if you just look at inflation this year—
Paul Winkler: Exactly.
Ira Work: It’s 6.872%. He’s way behind.
Paul Winkler: Yeah.
Ira Work: So that’s why he needs time to become a little bit educated as to the different returns of the capital markets. Not taking an aggressive portfolio.
Paul Winkler: Right. Maybe a middle ground.
Ira Work: But one of the things I would show him would be the Trinity study, showing that he has to have at least 50% of his money in stock. And that had a 91% success ratio of not running out of the money over a 30-year period.
Paul Winkler: Right.
Ira Work: So to have no stock in the portfolio at all, in my opinion, would be malpractice on the advisor’s part.
Paul Winkler: Thank you. Exactly, Ira.
Should Advisors Let Clients Avoid the Stock Market?
That is the thing that really bugs me.
They’re talking about, “You could be sued for recommending a portfolio.”
And by the way, there was a retirement fund that was actually sued for putting $600,000, $700,000—it was a $600,000–$700,000 retirement portfolio that used all fixed-income.
And that was a lawsuit I remember reading about. It was probably 10 years ago, something like that.
And they were sued for being too conservative.
So are you going to be sued for whatever you do? That, to me—I mean, look at that.
Ira Work: Here’s the thing. You’re not going to be sued for everything you do, but there is a possibility that you could be sued for anything you can do.
That’s why we see these billboards out there that say, “You deserve to be paid,” or “Don’t pay us unless we win.”
Paul Winkler: Mm-hmm.
Ira Work: Because there’s a lawyer out there that will take any kind of case and then take 30% of money if you win.
So an advisor can do everything perfectly right. And that’s why we document the way we document.
Paul Winkler: Sure.
Ira Work: That’s why we scan all of our documents and have a backup in the cloud.
I just wonder what happens when the wind blows the cloud away, where my documents go. But I digress.
Paul Winkler: Different kind of cloud. I’ll just help you with that one.
Ira Work: All right.
So the point being is, can you be sued if you just listen to what the investor says?
“I don’t want to be in the stock market.”
If somebody came into my office and said, “Look, I don’t want be in the stock market. I just want money market funds. I want guaranteed—”
I would simply say, “You know what? I appreciate you coming to visit with me.”
“But I’m willing to take time to help educate you. But at the end of that time, if you still have that philosophy, there are plenty of people out there that will be happy—”
Paul Winkler: That would sell you whatever you want.
Ira Work: Correct.
Paul Winkler: That is such a good point. Yeah.
So the reality of it is, you’re part of the problem if you just do whatever somebody walks in and says, “Hey, this is what I want.”
I believe strongly that I can educate a person to the point where they’ll do what they should do. And if I can’t get them to that point, then yeah, we part ways happily.
Ira Work: Right.
The Advisor’s Purpose Is to Help the Client
Paul Winkler: But I think that it’s sad that in the education material for financial advisors that they just basically say fall over, and just do whatever the client wants, and put them in a short-term, fixed-income investment.
And that way you don’t get sued. Okay, so that’s great.
Well, guess what? You didn’t help the client either.
What is the purpose of an investment industry if you don’t help people do what they ought to do? And through education?
Paul Winkler: For example, the first thing I talk about when it comes to this, when I talk about risk:
What are they worried about? Losing all their money. Well, what has to happen for you to lose all your money?
You’ve heard me say this before.
They basically—if I’m diversified the way I should be, in tens of thousands of companies, all of those companies simultaneously have to go bankrupt with no residual value.
What caused that? Earnings had to go away.
If earnings all go away, and all these companies go bankrupt, and I lose all my money as a result of investing and diversifying the way I believe you ought to diversify a portfolio, then earnings have gone away. People are laid off of their jobs.
You don’t have tax revenue. If you don’t have tax revenue, you don’t have a government.
If you don’t have a government, you don’t have a money market account.
If you don’t have a market account, and you don’t have CDs, and you don’t have interest rates, you don’t have Treasury bills.
Guess what? Everything that you put this person in the stupid portfolio is for naught. It falls apart anyway.
Ira Work: And then there are only four things that you really need to have. You need to have rice and beans. And guns and bullets to protect your rice and beans.
Paul Winkler: Pretty much.
Paul Winkler: Paul Winkler, “Investor Coaching Show.”
Ira Work.
Couldn’t have said it better myself.
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