Paul discusses an article in Financial Advisor Magazine titled “Where Are the Retirees’ Yachts?” He pulls back the curtain to help investors see why the investment industry makes large profits while investors get weak returns. In Part 1, Paul explains how the firms disguise market timing and how the financial industry designs its messaging to push you toward the products with the highest commissions.
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Paul Winkler: And welcome. This is “The Investor Coaching Show.”
Paul Winkler, talking about the world of money, investing, retirement planning, financial planning.
And actually, I had a question that came in that I’m going to get to in a second. But there was something else that I felt compelled to share.
Telling the guys in the office this week, I said, “There’s this magazine that came in, and I have to talk about it.”
So one of the many financial publications I get—Financial Advisor Magazine—I don’t often talk about the magazine here on the show. But this is one I get, and I’ll peruse through it.
And I saw this … you know how you ever get these magazines, and then on the front cover, they got whatever’s on the magazine?
But what they do is, they paste another page on the front cover. So they have a page that they put this little sticky, gooey, gluey stuff, but it doesn’t stick so hard that you can’t just rip it off.
But it’s on there, and it’s like the cover of the magazine normally is. As a matter of fact, got the logo of the magazine up in the corner, and they have everything there.
But it’s actually a cover on the cover, and it’s just an ad. So actually, I’m not going to cover that first because I think it actually makes more sense to come back to it.
This magazine had one such cover on it. So actually, I’m going to pull it off, and I’m going to tell you what the actual cover said.
And I want to walk through this because there was an article inside that I thought I would talk about a little bit in depth, because I think it’s educational to hear a little bit about what the industry hears: people in the industry, the magazines that they read, and what is marketed, so to speak, to them from the investment industry side, where you’ll have people writing articles.
And this is a big area of education for many advisors that go and read through these magazines.
This one had a cover story. It was “Where Are the Retirees’ Yachts?”
And this hearkens back to something, it’s actually a phrase that I’ve used on this show before, because it comes back to … there was an academic, and I don’t remember exactly who this professor was, getting a tour of Wall Street.
And getting this tour of Wall Street, he is down by the harbor, I guess, down there by the water. And this person points out to the water and says, “Hey, look out there. That’s all the brokers’ yachts.”
And the professor looks out there and goes, “Where are the clients’ yachts?” He’s looking around, and “Oh, good point.”
But this article is talking about the investment industry, and some issues going on, and just what some of the struggles are that the investing community or that the clients run into when it comes to planning for retirement.
And the article, which was the cover story, says the financial advice industry is reporting record results, but most retirees will struggle.
And I’ve railed about that for 20 years here on the show.
And you’ve heard me say why some of those problems are occurring, and if you haven’t, well, stay tuned, because I’m going to reiterate a few of these points that I think are so important and why is it that the industry’s doing so well, but the clients aren’t doing so well.
Well, it says, “Retirement is here. [It’s] all around us.
“The median age of our clients is almost 70. Stories about clients’ lack of financial literacy and preparedness are everywhere.
“The top advisors might reply, ‘My clients are all set.’
“But what about the other 97% of people not lucky enough or wealthy enough to earn that level of attention from skilled professionals? Most Americans are on their own.”
And this is so true because, we go back 50 years, and everybody had a pension. So they didn’t have to think about this stuff.
And I’ve talked about how the problem is now people have to think about this stuff.
And quite often, what they do is they feel so ill-prepared to think about any of this retirement planning and investing and how to calculate the number that they need or how much money they need for retirement, they just blindly trust a financial community that may not necessarily be terribly trustworthy or terribly educated themselves.
Let me take that back about trustworthy. It’s not necessarily that I believe that the financial industry is trying to take advantage of people.
Most of the time, they’re just not terribly well-educated themselves.
And they’re saying that the top advisors, they’re fine. And they’re probably referring to that there is a group of people, there are a group of people that are pretty well-educated advisors.
Matter of fact, I had a friend of mine who was one of the professors at one of the universities that teaches financial planning. And we got into a conversation about this.
And I say, “So what’s it like? You go around the country, and you meet with financial advisors in various places. What do you find?”
And he says, “Actually, Paul,” he says, “it was a shock to me because I was expecting that people would have a high level of knowledge in the industry, and they didn’t. We’re used to dealing with people like you that have …”
Because I have eight different financial lending designations, and all the people that work with me, in all the different offices, we’re all degreed planners.
I always have my guys go way beyond that. Registered investment advisor is great, but there isn’t much to get that particular Series 65.
You just go and study for a few weeks, and you got it. And that’s all it takes to call yourself a financial advisor for most people.
And a lot of people don’t even have that, and they call themselves an advisor because they get an insurance license or something like that.
But getting a financial planning degree: good, great, go do that. But go get some of the other designations: wealth management, certified professional, retirement income certified professional.
We got people that are with us, enrolled agents. We have people that are dealing with special needs planning, designated in that particular area.
And there’s just a myriad of different designations that you can get on top of that, but making sure that they have the base of the financial planner.
But he says so often what happens is he goes out there, and he finds that they don’t have the level of knowledge that he’s used to seeing because he deals with degreed planners all day long in the college.
And when he started getting out in the field, it was a shock to his system.
So what happens here is they’re saying that 97% of people are not lucky enough or wealthy enough to earn that level of attention.
And you hear this kind of stuff, and unfortunately, where you got, “If you have a million dollars or more, you got to have that much money.”
Now some firms it’s just $250,000, but that’s the level that they want you to have just because the commissions on anything less than that aren’t enough to bother with you. Another pet peeve.
But a lot of times what happens is people fall through the cracks. Now, one of the things that we do is we have a very efficient way of dealing with people through education systems and seminars and workshops and videos and things like that, where you don’t have to have $10 million to work with a firm like ours.
So that’s something that I have consciously set up to be very, very different than what the industry at large is.
So anyways, talking about how people don’t get a great level of information, and a lot of it comes down to how the industry is run. If you think about it, when you ask somebody—ask a friend of yours.
Now, if you’re listening to the show here, and you listen to this show a lot, it’s not fair. You can’t answer this question.
But go ask a friend of yours:
So what does the financial advisor do? What are the things that they do?
What do you count on them for when it comes to investing, for example?
And getting me in the right areas of the market, getting me out of the wrong areas of the market when I don’t need to be in different areas, or watching what’s going on in the geopolitical scene, watching what’s happening with various companies, what’s happening with the stocks, choosing which stocks to hold, which funds, fund managers, keeping up on the fund managers.
That is really, you look around, that’s what you see happening.
Or you see investment managers buying index funds. And then what they’re doing is they’re changing the index funds and moving it around or buying funds that are investing in various sectors and sector funds.
And if you don’t think that’s what the advisor is doing? I always do this with people, and it shocks people when they do it.
I tell them, go grab your statement. Grab your investment statement, current one, most current one that you’ve got, and then go grab a statement from three, four years ago, and look at how many differences there are.
You will normally find that the differences are stark.
Then look inside the funds themselves. And you probably won’t be able to find the information on the fund four to five years ago.
There is a program that does allow you to actually look at that, Morningstar, but you have to pay for it, and then you can see Style Box history.
This is something I often will teach financial advisors to do, is go look at the fund in the Style Box history. Now, it looks like a tic-tac-toe box, so you got nine squares in it.
And what you can see is that Morningstar will actually track what was the Style Box last year.
What was it the year before that? What was the year before that?
And one study I’d actually seen, and I have in my book, it was something like 76%—I forget—it was, like, three-quarters of mutual funds had changed their style in the last calendar year.
That is a form of market timing. So what’s going on when it gets down to how the money is being managed, quite often, it’s that.
It’s a form of market timing.
Now, market timing, you normally think of, “I’m 100% in cash.”
“And gee, I think the stock market’s going to go off. So I’m going to go and shift it all into the stock market to get in there before it goes up.”
Or “I got all my money in stocks, and I think the market’s going to go down, so I pull my money out.”
That is the purest form of market timing. Market timing is typically not practiced that way in the investment industry.
Normally the way it’s practiced is, “Hey, we’re going to lean a little bit more with value stocks.”
You hear, “Oh, I think that there’s going to be a shift into value over the next coming period of time.” And then you’ll see fund managers start to shift more over there.
“Oh, I think international, it’s time for that to do well.”
“Oh, I think U.S. is going to do really well.”
“Oh, I think we need to be focusing more on large-growth companies because they’re more stable for this.”
Whatever.
That is the pure definition of market timing. Then you can look at the funds, and you can look at the turnover ratios inside the fund: buying and selling activity.
And it’s not unusual to see 60–70% turnover inside of a fund. In other words, 70% of the stocks are different from what they were the calendar year before.
So that’s the type of stuff that you see, and that passes as investment advice. And that’s typically what you’ll see when you …
I’m telling you, we have analyzed portfolios for a couple decades.
Before that, you didn’t want to talk to me because I was part of the problem. I was a broker as well before that.
But now, and if you look at the last 20 years when we look at these portfolios, this is the type of stuff we see. An overabundance of one area of the market.
For example, in recent years it’s large U.S. stocks. People are just overrun with large U.S. stocks.
Now, in the late ’80s, that wasn’t what you saw. Believe it or not, what you saw in the late ’80s was international: investment advisors piling on international stocks.
In the ’90s, U.S. stocks did better, and then they got burnt that way. It was constantly timing in that way.
So that’s one of the things that I’ve pointed out for years here.
It says, “The numbers of people looking for (and requiring) assistance are rising. Most haven’t prepared for the lifestyle they want and will have to make adjustments in real time.”
Instead of preparing ahead, it’s reacting instead of acting when it comes to how most people actually engage in planning. Very, very true.
So there are three talks that they recommend in this article. Number one is, “Good planning involves three talks—one about finances, one about investments and one about family.
“Financial conversation. [This] addresses the nuts and bolts of how much we need [and] how much we have—[the] income [and] expense realities associated with retirement.”
So how much am I going to need? And this is going to depend.
How long are you going to live? I mean, you don’t need much if you’re going to be around for one year.
But you may need a whole lot more for a person that might be around 30 years in retirement. And that is not unheard of by any stretch of the imagination.
Talked about that last week. I talked a little bit about the statistics on what percentage of people, if you have a couple, that one of them will be around to at least age 90.
It’s the vast majority. So you look at that and go, well, your money’s going to have to last a while, and if it’s all in fixed-income investments, perish the thought of keeping pace with inflation.
And then they had a professor from one of the colleges.
He says, “Delaying retirement and continuing to work is the most effective way to ‘shore up’ a leaky retirement plan.”
Well, this happens to be a guy that I disagree with a lot so I’m not even going to say his name, but he often talks about annuities. Yeah, because they’re taking your advice and buying—
And there aren’t many—you get a couple, couple of financial, these professors, that will talk about annuities. I wish it were none.
Sometimes annuities actually make sense. There are a couple times that they make sense.
But sometimes it just seems like you’ll get a couple of them—and they’re just a couple of them out there—that will recommend them.
And most are like, “No.”
Because if you have inflation, and your need for money doubles over the next 15 years, 20 years, or 10 years—rate of inflation right now is even faster than that—your life income is dropping significantly before your eyes because the value of the dollar is dropping.
And if you’re using a fixed-income investment, you don’t have a hope of outpacing inflation.
And what happens so often is the people out there selling these annuities that get really high commissions will parade in front of you the couple of professors in the country that are really big on them.
I just don’t know many, except for there’s a couple.
But anyway, this guy says, “And you need to keep working.”
Well, yeah, if you do what this guy normally talks about, yeah, you probably are going to have to continue working. At 90 years old, you’ll still have to work because your income from your fixed annuity isn’t purchasing a fraction of what it used to.
Anyway, I digress. I talk about those enough.
Another professor, Boston University, he says—he’s got a book on how to manage. And he talks about—Money Magic is what his book title, I guess, is.
“How to manage for the entire family … unified managed household, tax planning integrated with investments, more precise healthcare estimates based on our clients’ actual health.”
And some of that is valid, looking at those types of things.
What is a person’s health? As I’ve talked about before, if a person is in better health in retirement, the reality of it is that their healthcare expenses tend to be much less, not just for the most obvious reasons that they don’t need healthcare as much, but they typically tend to square the curve as I’ve talked about.
If you’re in really good health, you don’t tend to go through that slow decline where you end up in a nursing home for many, many, many years.
And I hearken back to a conversation I had with one of my clients that runs nursing homes that I talked about recently, and he said that.
And I have another client of mine who’s a nutritionist, and she always talks about that: “Square the curve, square the curve. Eat well, exercise.”
And the reality of it is, if you look at the statistics and the reality of it, people don’t tend to go through that long, slow decline where they end up in a nursing home for many, many years.
Now, there are a few exceptions. There’s always an exception in every rule.
But that tends to be the case.
“Liquidity preparedness for big expenses and [to] minimize disruption.”
Sometimes, for liquidity, you’re making sure that you have a little bit of cash on the sidelines for those liquidity expenses. But sometimes people will set up reverse mortgage lines of credit for liquidity and those types of needs.
In one of the quotes, it says that “When people in the Peak 65 generation entered the labor market in 1980 … 60% of private sector workers relied on protected income [from] a pension plan.”
And now it’s only 4%. And a lot of those people had pensions that have COLAs.
Now, if you think about the annuities that are sold right now, you don’t have COLAs on them. You don’t have cost-of-living allowances on them.
When you look at pensions, you don’t see those COLAs except for in the government area. Sometimes you see those in that particular area, but a lot of people don’t have that so they’re going to have to prepare themselves for this.
Now it says, “The investment conversation … like the financial conversation, this one involves considerable forecasting—most notably prognostications about the future performance of markets, interest rates and inflation.”
Now this is another area. They’re saying in this whole article that the investment industry is problematic and a lot of the financial advice is problematic.
There’s part of the problem, right there.
What are they saying in this article? That they’re trying to predict the future: prognostication, trying to predict the future.
If we look at markets, and we go back through the Depression—1920s until today—the average rate of return, the historic average rate of return through every single 30-year period, bar none, even the most recent 30-year period which includes 20 years that was kind of rough, the rate of return of large U.S. stocks is about the same within a percent or a percent and a half.
If we look at pricing of stocks—what price they’re selling for, for every dollar of earnings—we don’t see differences compared to history.
So what happens is some of this stuff that’s being put out there is making dire predictions about the future. Why is it they’re making dire predictions about the future?
And most notably tend to sell fixed products, which most notably tend to be the highest-commission products out there and the highest-paying products to the investment industry.
Let me do this. I’m going to take a quick break, and I’m going to talk more about this because I have a hearty disagreement with that line in an article that basically says there’s a problem in the industry.
They’re actually saying something that’s problematic and part of the problem.
I’m Paul Winkler. Listening to “The Investor Coaching Show,” right here on SuperTalk 99.7 WTN. I’ll be back right after this.
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Advisory services offered through Paul Winkler, Inc., an SEC Registered Investment Advisor. Paul Winkler, Inc. does not provide tax or legal advice: please consult your tax or legal advisor regarding your particular situation. All information contained on the Paul Winkler, Inc. website, including information in our newsletters, as well as information posted on social media, is for general informational purposes only, and should not be considered an individualized recommendation or personalized investment advice. We do not intend for this website to be utilized by any persons who are covered under the GDPR.
