Transcription
Paul Winkler: This is the Investor Coaching Show. Paul Winkler, along with Mr. Evan Barnard and Mr. Ira Work, hanging out here with me in the studio today, talking about the world of money and investing and dodging lightning bolts.
Paulwinkler.com is the website and you can get the podcasts there. That is, downloaded right on your phone or whatever devices that you happen to use and even turned into text that you can read, if you’re so inclined to do that. And of course the video on the website is always there and they’ll see that not our clients.
We’ve got the, you know, I just want to remind you that there is a place that you can go client login. You can see all those other videos there. Don’t forget that I’ve had to refer a lot of people to some of the videos that I’ve done there. Many of them have been updated for state planning, those types of things. So if you work for their firm, you know, that’s another one of those little perks. We got that hidden website with some pretty cool videos on there and educational material. And somebody was asking me if I had my book in audio form. I just have not; I probably need to do that at some point.
That would probably be good because a lot of people are in audio. You guys do audio books. I have, my son does them all the time. Yeah. I mean, he loves it. I just think people would be crashing, listening, listening to numbers, you know? Cause you know, cause I think about the, what do you do with all the charts that I’ve gotten? My book, there were so many charts. It’s such a visual book. Right? I mean it would be, that would be tough. Yeah. I don’t, I don’t know if I would be better suited for narrative kind of stuff. Yeah. I don’t do that for business stuff.
Certified financial planners
Okay. So guys, one of the things we ought to talk about here is a question of choosing a financial advisor. And I thought we’d spend a little time on this because I do spend a lot of time talking about one of my pet peeves of the investing industry is the fact that very few investment advisors actually are certified financial planners. One study said that there’s not even 30% of advisors here in the US that have CFP marks.
I’ve seen lower than that. I’ve seen that. And I think that you’re probably, if you start including other people that do ancillary type of insurance planning and a lot of those other things, they’re not even considered in that percentage. So if you start including them, you actually drive that number down even further. I would think so. Yeah. I have a sneaking suspicion, but if you look at countries around the world like Australia, they’ve got an advisor competency standard and it mirrors the CFA, the certified financial planner board standards.
You’ve got to have a degree. You have to have experience. You have to go through an exam, continuing education. And there are countries around the world that are requiring this. And do you guys remember how much of the education that you went through? But I think we forget how much and where this comes home for me. I have interviewed people before to come work for me and said, man, I just really want to be a financial advisor.
And over the years I’ve had many of those types of interviews, right? I’m sure you guys have as well where somebody comes into your office and he goes, “Hey, I would really love to do what you do.” And I start asking them questions. And even when people have had, even when they’ve been degreed and they have a certified financial planner degree, I find that even that is still just the beginning. And I’ve been amazed where people have said, I’m just really, numbers are really good. I’m really good at this financial planning. It just seems to me, it’s just like, like breathing for me.
Financial planning
I think this is what I need to be doing with my life. And I started asking them questions and I realized, Oh my goodness, you, you, you have a long way to go. This is not going to happen. And the reason gets down to education. I think people need to have an appreciation of the types of things and listen to this with an ear to types of things that planners can help you with if they are actually degreed, you know, think of it in those terms. So one of the courses that you have to go through is financial planning, roles and responsibilities. And what you’re dealing with there is, you know, how to communicate techniques, behavioral finance, which is huge, right?
I mean, when we look at behavioral finance, one of the biggest reasons that investors get really bad returns is behavior because we know we should buy low and sell high. Yeah. It’s actually not one of the reasons it actually is the reason it really is Ira. And you know, the thing that is in behavioral finance you’re dealing with so many different biases from a human standpoint. Well, the reality is the one thing that any investment advisor or your mutual fund manager, you know, stockbroker, the one thing they don’t know is what’s driving the person, putting this trade in.
Ira Work: You know, I was talking to a floor trader from Merrill Lynch and we were talking about the efficiency of the market trading system and how efficient it is, balancing trades and so forth. Yeah. And he said, the only thing we cannot factor in are the emotions of the investors. Yeah. And that’s a biggie and that’s a biggie. Right. And you look at how you buy a mutual fund. You know, typically you’re going to buy it because of something that has nothing to do with what future returns might be.
Paul Winkler: You think it is. Yeah. You think that’s what you’re buying it for because you’re, but you’re looking at things that have nothing to do with performance. And that’s one of the big ones is what’s historical performance. You know, how recognizable is the company? How recognizable is the fund? How recognizable are the companies, the stocks inside of the fund? You think that’s the driver, but it’s not, but there’s other things that individual investors will look at. I remember, you know, brokers telling me, well, I looked to see what charter insider trading is.
Ira Work: Sure. You think that would be an impact. So if Bill Gates decides to sell 10,000 shares of Microsoft and we don’t know, is he doing it to buy a new yacht? Exactly. That’s a really good example. You think it’s because he thinks it’s going down, but it may not be hit at all. I mean, when Jeff Bezos was going through his divorce, who knows how many shares he had to sell. Sure. A great example, another thing you learn in that course, you’re talking about financial statement, preparation, and analysis, right? Do you really get that? Probably not time value, money, money, concepts, applications.
Paul Winkler: You might get that to some extent, but applying, it may not necessarily be as intuitive as you think. Education planning, funding, how many different types of education funding, what are the caveats then when you’re dealing with education funding for kids, you know, for example, what if the child ends up in some getting a scholarship? What are the taxes and the issues of pulling the money out if it’s not for use for education purposes, what about the, a state planning implications of five nights? Right. And I think that there is also, this is still in section one, by the way, financial planning, roles and stuff.
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A planner needs to keep up with changes
Evan Barnard: Are you going yes. If I’m in the first course and then amazing I’m in the first course, you know, I kind of, I think this speaks to a combination of education and experience because you can, you know, you can learn those things. You know, you can study the test and review questions and you could pass the course and you might be able to say, well, here’s why you want to use a section 529 plan to fund your child’s education instead of an education IRA ABCD, but that doesn’t necessarily speak to will about 40 plans, 40 plans, 40 States, 529 plans.
You know, that kind of stuff isn’t covered in the curriculum, but you do need to know both. You can’t just say, well, the Virginia plan gave me the best golf ball. So that’s what I’m going to recommend. And it’s funny you say that because over the past 15 years, I’ve had three changes in 529 plans that have been recommended to the clients. Right. And you know, you know, the ones that I recommended years ago, I don’t recommend anymore because there were changes in the plans.
Paul Winkler: Exactly. And you better keep up with all that stuff. That’s an excellent point. You know, so you have that, you have economics and the external environment. I, you know, that, that was, that was a name that was an ACE. That one bias. I love that one. That was, I loved economics, but a lot of people don’t really understand it quite as well as they might think an ethics and standards of conduct, which is, you know, that’s, that’s important, but you know, but not necessarily that the client needs to know that, cause they’re not going to do something unethical for themselves. But additionally, the course offers a deeper understanding of the role and responsibilities of the financial planner, analytical skills to aid the financial decision making process. So that’s the first course. Second one, let me, let me pause.
Ethics
Evan Barnard: Yeah, man, cause you kind of glossed over something. I don’t know if it’s in that segment or a different one or, you know, topic, even from the advisor standpoint though, the ethics and all of that stuff, at least for CFP, honestly don’t know what the, your current, you know, your standards are chartered financial consultant, but we have an ongoing financial review and obligation to report any misuse of, you know, finances. Or if I, you know, if I got a DUI, if I got to this, all of that gets reported to the CFP board.
So I, I don’t want to, well, we have that as a shirt over that as a firm, we do, you know, and so, you know, I, every year, every other year have to fill out, did I have a financial struggle here, this or that? And so, I mean, I think that is maintaining the mark and probably, you know, you, you do want to stay on top of that. Your person does need to be ethical and you need to have some confidence that they are. Yeah. Well, I was talking about that.
Paul Winkler: That for that particular course would be important for the person, the individual, if you’re working with an advisor. Yeah. I wasn’t even thinking about that. And that’s a good point. If you’re working with an advisor, you would hope that they have that kind of background. That’s an excellent, excellent point. Yeah. And then you got planning for insurance needs is another one, another course that you would take and you’re getting into fundamental principles, risk management. Well, you have lots of different types of risk management. You know, I liken it to having a moat around your castle. You know, you may have a great investment program, but it’s all for not, if all of a sudden there is an aspect of risk management that you didn’t think about that might be applicable to you.
It’s tremendously important. We spend a lot of time on that. I
An example
Ira Work: I’ll give you an example of that too, though. When I was, I had a friend of mine read to all my insurance. Okay. It was with one company. He asked me who was at my house for a party and the person who I bought the house from, they put in this custom cabinetry in the kitchen, right. He said, has your insurance guy ever been out here? I’m like, no. He said, well, you know, those old custom cabinets, he said, you know, your typical homeowner’s policy with that company is not going to cover it.
They’re going to cover the builder grade. I’m like, well, what’s builder grade. He said, basically what you buy off the shelf at Home Depot. So he redid all my policies. He was only going to be more insurance, lower, lower premiums. And then it came to getting the umbrella policy. So the umbrella policy that he got me actually will pay me the million dollars if I’m here on my motorcycle, by an uninsured motorist and an important thing to think about, you know, it’s just not something that you would.
Paul Winkler: And a lot of times people don’t even have umbrella policies. They’ll go, well, you know, I got this policy and you go, well, do you know what the limits coverage are? I don’t know. And you find out that it’s a hundred thousand dollars, $300,000, and you go, when’s the last time you saw a major lawsuit, you know, where somebody got in an accident, they were at fault where the person suing them only was looking for a hundred thousand dollars. Right. And cause I drive back and forth to Florida a lot. And the billboards are like, so and so got a $787,000, you know, and you have these laws, these billboards that say you deserve to get paid, that’s the hammer on their billboard.
Ira Work: But the interesting thing is there are very few and Brian was telling me, there are very few umbrella policies that will actually pay the policy holder. Right. If something happens to them. Yeah.
Paul Winkler: And you had disability policies used to do that too. They used to fight over showing, “Hey, well, we’ll actually pay you instead of just reimbursing.”
Ira Work: You know, the other thing too, that Brian brought out, which I had not given any thought to is that, you know, if you’re a liability, it’s a hundred thousand dollars. That’s what your insurance policy is just like the insurance company pretty much writes that check. But when you have that $500,000, because when you buy car insurance, you’re going from $100, $300 to $255 as a base, and then you throw another million dollars on top of that. Right. He said for one and a half million dollar claim, the insurance company is sending their lawyer.
Yeah. Not, not a bad thought cause they know that it could be on a hook for a lot of money. Right? Yeah. That’s a good point. And then another course that’s in the CFE or charter financial consultant, either one of those designations income.
Paul Winkler: So you’re going to be looking at income taxes for individuals, fundamentals of income, taxation, taxation of income generated from personal professional investment related activities. You’re dealing with deductions credits basis, rules, depreciation, taxation of capital assets, non-taxable exchanges, passive activity, loss rules. And you know, so a lot of these things you go like, what the heck is that? Well, right. That’s the idea and retirement planning. That’s another course that you might be taking, looking at.
So you’re looking at Ira, simple steps for three BS, four 57 plans, deferred compensation plans, non-qualified plans, social security, and employee benefits and how to take social security and orders of taking social security and, and different techniques and strategies for that. You’re looking at distribution planning in that particular class asset accumulation, what types of assets should you be putting money into principles of investments? It’s another class you’d be into. And you’re dealing with the securities law market structures and asset classifications and taxation of investments and all kinds of, you’ve got different investments that are taxed at different rates on the accumulation.
And you need to understand the differences between those portfolio theory and market efficiency against that. Here’s a funny story. As I was going through the CFP CHFC program to become a charter financial consultant, I did like, I don’t know, four or five classes. And then I got to the investment principles class and I was like, Oh, I’ve been doing this for eight years. Oh, that’s funny. I didn’t read the book. What a great story I went in. I took the test and failed it. What a great story.
Why didn’t they tell me?
Evan Barnard: And something else to point out is, as you’re kind of going through that list, both looking at the taxation and the retirement strategies. I don’t know if it happens to you a lot, but we’ll go, we’ll be in a planning session and we’ve been working with somebody for a couple of meetings and so forth and we’ll go through a particular strategy. And one of them will say, well, how come my person never said anything about that? You’re like, well, I don’t know.
But yeah, this is certainly something that you could be doing. You know what I mean? Just why didn’t they ever tell me this? Absolutely. Because they didn’t know or they were afraid to offend you or something. I think the bigger question that I get more often is, well, why did they do that? Yeah. And my answer, right? I don’t even know who you’re talking about so I can tell you why they were going to plead the fifth on that one.
Paul Winkler: And I, cause it, cause you know what, I just don’t, it’s no need for me to go and disparage somebody else. I’m just to say they didn’t do it. And let’s, let’s move on. Right? I can’t speak to the other person’s state of mind. And then, you know, the estate estate planning, dealing with estate planning and, you know, state taxation, property interests, transfer strategies during life and death and use of trusts generation skipping transfers, charitable giving, you know, which assets should you be giving to a charity, which should you be giving to a natural person that death, you don’t just go life.
Well, yeah, but you know, in death that you know, is, is often, you don’t think about that. There are different tax treatments after you pass. And there are certain assets that if you want to help your church, there are some assets that are way the heck better to give than others in terms of handing stuff over and what should be in your will. And there’s a lot of things that pass outside of probate. They pass outside of your will. And you know, you’re going to have a lot of your estate for a lot of you listening that is going to be passing by beneficiary designation. So I think it’s critical just to get an idea when you hear me harp on this idea of that, it’s really, and then, you know, not only that, but you have, you know, experience requirements to get these degrees, these designations, and you know, really the coursework is comprehensive.
And as, as a person out there, you look at it and go, well, don’t you just pay a whole lot more to work with a person that has that level of experience. And I would look at it and go, no people are paying way higher management fees and expenses for way less. And that is the reality of things. And you know, a lot of times they’re paying commissions on top of that, working with these advisors and they don’t realize how much money is actually going out of their pockets and going to an advisor that is really a sales person and not degree, not qualified in any way, shape or form, well, a mistake or attacks.
There’s going to be way more expensive than any difference in fee anyway. And that’s an excellent point and you don’t let us charge enough anyway. So, we do have the luxury of volume or mistakes are way more expensive than, than a cost of a particular fight. Bad advice, free, bad advice is extremely costly. Yeah, and the moral of the story, you know, don’t discount the value of good degreed planners when you’re dealing with your financial plan.
You are listening to the Investor Coaching Show. I’m Paul Winkler, along with Evan Barnard and Ira Work.
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