Paul Winkler: All right, welcome. This is “The Investor Coaching Show.”
I, like you, probably, am waiting for some kind of rain, thunderstorms, anything. Maybe it’ll show up. Good grief. I don’t know, it’s sunny, forget it.
Nick: Clear blue skies.
PW: So if we’re not going to get any thunderstorms, we’re going to talk finances. That’s all that’s going to happen.
Frustration in the Medical Field
You know what, I actually had a few things that happened today, speaking about storms. I was trying to put stuff together for the show and some of the stuff I put together is just gone.
It just disappeared. One of them was a Reader’s Digest article that I was reading about. I was talking to Nick about here and these people, these practitioners in the medical industry, and the frustration that they have with the medical industry, that’s really kind of what it was all about.
How these people had gotten into medicine and wanted to take care of people, that was it. They just wanted to take care of people and the article got into talking about how the insurance companies, the big medical organizations, just how frustrated they are with them. And this has been making news all week long with Kennedy and how he was talking about the big line in the sand that occurred in 1989.
What does this have to do with finances? It’s going to have everything to do with finances. In just a second, I’m going to get to it.
But it was all about how if you look at the rise of certain illnesses and issues, psychological issues that people are dealing with, a lot of it you can trace back. Some people will say that, and I have no expertise in this, so I’m just saying what people are saying; I’m not going to make any comments on it.
But it’s about vaccines, additives in the foods, and some of the things that we have in our foods here in America, you just don’t have in other parts of the world — they’re just illegal, and you can’t have them. And so people are talking about ASD and talking about ADHD and things like that that we’re finding with kids, and depression, anxiety, and things like that, and how much of it is a result of these things.
Well, people getting into the medical world, they go to school, they graduate and they’re like, “I want to make a difference.”
They get out there and they find that the system is just stacked against them and they can’t do what they wanted to do.
This whole thing in Reader’s Digest was about how these people are super, super frustrated. And all I could think is I can so relate to that. At least these people were smart enough to figure out that the industry is stacked against them.
Advisors Recommending Bad Products
Whereas, so often I get frustrated because, in the financial world, the advisors don’t even recognize that there is a problem. And as I was going through and preparing for the show, I was finding things that were saying exactly that. Some of the things that I was finding were in regard to investments, investing strategies, and the big insurance companies coming out with products that are really not great for people.
I mean, one of the things I’ve been working on right now is this thing that I was going to send out, just a mailer. I was thinking, I want to offset. I don’t know about you, but I get so many mailers every day — every week, I mean, not every day. But every week I’ll get mailers inviting me to some steak dinner someplace and the investments that are talked about at these dinners are just awful.
So what I did is I started looking around and just seeing what other people were saying about it, and I actually saw a law firm out of Phoenix, but they had done a presentation in Memphis for the Elder Law Conference that was held in Memphis, and they were literally just making the point that these products are “uniformly horrendous products” and inappropriate. And they said one of the worst of the worst were the ones that I see the most and I’ve railed against the most here on the show.
Almost to no avail, though. It just seems frustrating to me because I see so many of these products being pushed out there in record-breaking numbers.
Indexed annuities are number one; that’s one of the big ones.
He goes, “This is uniformly one of the most horrendous products out there, and it is being sold in droves.”
And people are paying commissions of 10% to 15% of deposit amounts. One of the points that I made in my brochure is I said, “This is the subject of numerous warnings by government regulators.” If you look at the regulators out there, FINRA — Financial Industry Regulatory Authority — you look at the SEC, you look at their estate attorney generals, there are state attorney generals offices that are literally saying, “These are always inappropriate.”
And you go, “Well, why is it that investors can invest in these things? Why is it that firms can actually push this stuff? Why is it that investment advisors can recommend these things?”
Because it’s a free country and you can do whatever you want as far as you can go out there and recommend things as long as you’re not misleading in the disclosures.
But here’s the issue: Who on earth reads the disclosures? People don’t.
Giving Specific Financial Advice
The point that I was making was that commissions on the products can reach over 10%. This guy in his thing said 15%, but I decided to be kind and just say 10%.
And I said, “That’s not just a car payment for the salesperson of the product, that’s a car.” You give them $300,000, you give them part of your life savings, and they put it in there and they’ve got a new car on you.
I’ve had meetings and I’ve talked to people this week, and I’ve just made it a practice where I just want to talk to people, just general people out there and go, “Tell me about your experience with finances. I just want to know what you have to say.”
And this is something that we’re going to be doing in future shows too. I did a thing on OpenLine on Channel 5. Nick, you weren’t even here when we talked about that at all.
Yeah, actually I was on OpenLine last week. Yeah, I think it was not this past week, but the week before I was on, and I took calls and I just wanted to make sure that I didn’t give specific advice.
The big thing is making sure I don’t give any specific advice because it’s malpractice as far as I’m concerned.
Nick: Mm-hmm.
PW: When I hear people call in radio shows and they give specific advice, I just shake my head and go, “That’s crazy.” You don’t know enough about this person to give specific advice.
Nick: Yeah, where are the credentials?
PW: Or where are the credentials? But also you don’t know the entire picture. And you may be giving a piece of advice on something and there is something else in that person’s financial plan that actually would make it counterproductive for them to do what you’re telling them to do because you don’t know the whole picture.
So anyway, one of the things that I’ve been doing is just asking people specifically, “What is it that you have been given advice about?” And some of the things I’ve heard, I’ll give you a couple of stories about.
Protecting Against Downside Risk
One I had was this one, and the situation was that there was an annuity, and the annuity, they were like, “Well, I was looking at what am I going to be able to do with this, and is it going to be an appropriate thing?” And one of the things that never came up is how much it would cost to get out of it, the back-end surrender penalties.
Now, what was talked about was how safe it was. And my point as I’m listening to this is that the issue that you have is, number one, you have tremendous amounts of risk as far as not keeping up with inflation. The returns are throttled back.
It’s kind of like a car. If you’ve ever had a car where you can make adjustments to it so that it can’t hit top speed, basically you put a governor on it — that’s what it’s called — and you can’t get any faster or get up to what it’s supposed to be able to do. And that’s what happens with investment vehicles. Somebody tells you, “We’re going to reduce the risk on this investment; we’re going to protect you.”
This is one of the stories I heard this week. As a matter of fact, the person was talking to their uncle, and the uncle said, “Hey, here’s what you need to be doing. I’m using options on the investments to protect against downside risk.”
And my person that I was talking to was wise enough to go, “Well, look, those options cost money and they cost a lot of money, right?” “Yeah, yeah, but I protect myself against downside risk.”
But the problem that you run into is because of the way options are priced, you can end up not only increasing expenses, which drops your upside potential to protect you against inflation, but you also increase expenses the greatest when markets are most volatile because options contracts become even more expensive when markets are volatile.
Now, why is that an issue? Well, if we look, let’s say at history, and we look at the return of, let’s say stocks, large U.S. stocks after inflation, historically, the rate of return is about a 7% return above inflation.
Now, if we look at long-term bonds, it might be 2% to 3% above inflation. So let’s say that we’ve got a 4% spread between those two.
Now all of a sudden, you have increased your expenses, not only due to management expenses, but also the cost of options, then the trades and those types of things, and now you’ve reduced your returns by 2% to 3% as a result of those expenses, maybe even higher if you’re dealing with periods of high volatility. What has basically happened to your return?
Your return has basically approached the return of bonds, so now you have no protection against inflation whatsoever.
You’ve protected yourself against downside risk, which is where if the market goes down, there are protections so your portfolio can’t go down, but the cost of putting that protection in place has been so high that it’s reduced your returns down to the returns of bonds, and you’ve basically negated the whole benefit of it. And this is what is happening now.
The Hidden Costs of Insurance Products
If you look at these insurance products, if you’re starting in the hole at 10% to 15% because of commissions, now you’ve got that, plus you’ve got the throttling of it, you’ve got the governor, so to speak, on it, and you basically have reduced returns in that particular manner, and you have back-end surrender penalties, and you have maybe a cap.
A cap is where if the market goes up, they’ll only allow you to go up to a certain amount and then they’ll take away any return above that, and then they take away dividends, and then they actually, you’ll find they’ll have a participation rate where they’ll only let you get so much of the percentage of the market upside.
So there is always a cost that most people don’t even recognize is there with these products.
But what happens is you go to work for the investment company, you go to work for the insurance company, and I’ve done this, this is where I came from. Jonathan, one of the guys who works with me, he used to work for the banking system and the banks would say, “Hey, you guys got to recommend these types of things.”
Matter of fact, Jonathan loves to tell a story about when he was putting financial plans together for the financial planner at the bank. And the story he likes to tell is when he worked his tail off to get a financial plan together for a client, and he says, “It was brilliant, it was well put together.”
When the financial planner looked at it, he said, “This person gets a mutual fund. This person gets an annuity.”
He said, “Well, wait a minute, I came up with this financial plan.” “No, this person gets a mutual fund, this person gets an annuity.” And that was it. Jonathan had no say in it.
Ira likes to tell the story about how he was analyzing things and the supervisor basically said, “Ira, you’re thinking too much about this. You’re spending too much time on it. Quit spending so much time thinking about this stuff and analyzing it and get out and sell.”
Working for Big Investment Firms
Evan used to work for a mutual fund company. One of the other guys used to work for a mutual fund company — he worked for one of the big investment firms. When you have these big investment firms that advertise all over the place, you think, Hey, they’re really big, they must be really good.
No, they’re really big because they make a lot of money selling things that sometimes aren’t so great for people.
And that’s why all these guys are with me. Anne used to work as a compliance officer for an insurance company, and she got fed up with it. She used to write prospectuses for the investments. So I’m not speaking out of turn; all of us came from that particular area.
But it was frustrating to us that we were being told what to sell. I was with a couple of huge insurance companies, and my co-workers would not analyze anything at all.
I mean, they were just, “Hey, what do you want me to sell? What do you need? How much do you need to sell? How much do I need?”
I’ll never forget this campaign: “What is it going to take to get on the boat?” They had a cruise where if you sold, it was like $40,000, I don’t remember the number, it was $40,000 to $45,000 worth of commissions worth of things, if you sold that much, you got on the cruise. And there was a fervor, they had these meetings every single Friday to get on the boat.
They had T-shirts they gave us that said, “Get on the boat.” It had a picture of a cruise ship.
I’ll never forget, it was a white T-shirt with a blue cruise ship. It was a picture and it was, “Get on the boat. You got to get on the boat.” And you’ll have companies, I know of companies right here in Middle Tennessee, that will have Friday morning meetings where you bring in a client, and so much of that client’s money has to go in annuities or you get in trouble.
Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.
