Episode 38: Vampires
Segment 1 (Show Open):
Good afternoon, everyone! Welcome in. Welcome to Coasting in Retirement! That’s. Right. Thanks for joining us today, we’re excited to have you! Josh Null here, joined by the one and only Michelle Lee Melton, the honey nut to my cheerios, the whipped cream to my strawberry shortcake…Michelle, how are you doing? We are back again in Coastal College’s recording studio, beautiful downtown Fairhope, ready to put together another a great show for those of you tuning in!
Listeners: Michelle and I are here today to discuss financial topics relevant to those of you in or near retirement, living your best life along our part of the gulf coast. Here’s what we’ve got in store for you today: First segment – deep dive on our topic of the day. 2nd segment - at about 25 minutes past the hour - “Michelle with the News of the Week”. Then at roughly 45 minutes past the hour, stick around for our 3rd segment, we call it” Josh’s Crystal Ball and Big Mouth”. That’s right, big mouth. So buckle up, we’ve got a lot to get to!
Quick background on me for those new to the show. Again, my name is Josh Null, I am a fee-based financial advisor, I hold my FINRA Series 65 securities license, and I am the owner of Gulf Coast Financial Advisors, we are an independent investment management and financial planning firm with offices in Fairhope, Orange Beach, and Mobile! You can find more information on me and Gulf Coast Financial Advisors by visiting our website gulfcoastfa.com, or feel free to give us a call at 251-327-2124. If you missed that contact info, do not worry, we will repeat our contact info several times throughout the show!
So, Michelle, this past week you and I cracked open a horror movie from the 90’s, Interview with a Vampire. Now, for those of you not familiar with Interview with the Vampire, it stars Brad Pitt and Tom Cruise, it’s based on the book by Anne Rice, and it’s set mostly in New Orleans. I do hesitate somewhat to reference the movie, because, well, there are certain elements that many people would find distasteful, it is obviously a somewhat gory and bloody movie, but I would argue it’s relatively tame compared to what’s on TV today, and I think it does a great job of showing what 1800’s New Orleans probably was like. I’m also not ashamed to admit that I read quite a few Anne Rice books, including the best one called “The Vampire Lestat” that somehow Michelle has not read yet! (Michelle welcome to comment here)
The point of bringing up the Interview with the Vampire is that it gave us the inspiration for today’s episode, titled “How to Recognize the Vampires in Your Life…and ways to shed the light on them”. Now of course we’re not talking about real blood sucking vampires – those don’t exist, right Michelle? – but more reality-based vampires. I’m talking business partners that suck you dry, personal relationships that drain you of your life’s blood, and most important for our listening audience, the vampire activity that my industry, financial services, often inflicts on the investing public. You may be unknowingly paying thousands of unnecessary fees in your investment accounts to these financial vampires! Our episode today will give you the information you need to recognize these blood suckers before they get their fangs into your money.
The idea of using vampires as a show topic is also timely for a brief personal story I’ll share. Regular listeners will know that while Gulf Coast Financial Advisors has always been its own standalone business for years, up until April of this year I was affiliated with a larger company, or RIA in industry jargon. That larger RIA provided back-office and compliance support, investment portfolio management and trading services. During my time with this RIA, I often worked with a fellow advisor that shared this mutual affiliation. No names will be mentioned, but a little context to the working relationship I had with this advisor. Because I have a track record with marketing success and he did not, it was up to me to discover, nurture and introduce new client opportunities, then he would come in and provide planning services in areas where he had more experience than I did.
It worked reasonably well for the past four years, but when I formed my own RIA, Gulf Coast Financial Advisors, and broke off from this larger RIA, red flags that I had ignored over the years became issues that I couldn’t ignore any longer. I finally realized that my energy and time was getting sucked dry by someone that I naively thought was on the same page with me, but unfortunately, I was just a means to an end. Once that working relationship was terminated, I saw the real fangs come out. No blood was spilled, but it became crystal clear that I had let an energy and financial vampire get too close to me. Or, as one of my favorite clients said when he called me, “your buddy is a vulture”.
I share this story because my bet is that many of you can relate. As a kid, I spent a lot of time on my Grandma and Grandpa’s pig farm. My grandpa had a saying, “pigs get fed, hogs get slaughtered” and unfortunately a lot of people can’t recognize that their greed may result in short term gains but more often than not leads to long-term losses, including a lack of close relationships. Greedy people, energy vampires, financial blood suckers, can exist both in your personal and professional life. The frustrating thing is that they don’t often even recognize themselves for what they are, that would require introspection, which is not a common trait for the people that want to use you to accomplish their goals. And like a vampire starving for blood, these kinds of people often resort to desperate and manipulative acts that they justify with some sort of moral gymnastics that I have never been able to understand.
Now, you listeners didn’t tune in to hear me air my dirty laundry or sound like sour grapes. As has been the case with other vampires in my life, getting them out of my life always results in bigger and better things, a clearer path ahead. So, as Forrest Gump said, that’s all I’ve got to say about that. Pretty much any businessperson or entrepreneur has had a working relationship go sideways, and for me, it reinforced a lesson that Michelle has hammered into my head over the past couple of years. One, it’s OK to be a half-glass full positive person, but don’t be pollyannish, and two, get your agreements in writing.
So let’s pivot to what you all need to be aware of – the financial vampires in my industry. The first thing you need to recognize that while the general public may lump “financial advisors” into one pile, that fact is that there are significant differences in how we make money. In fact, many people that use the term “financial advisor” are not being legally accurate, but for sake of time, we’ll just call all of us advisors. There are insurance-only licensed advisors, there are commission-based advisors, more accurately called brokers, there are hybrid advisors, dually registered advisors, fee-based advisors, fee-only advisors…it’s quite a mess, and when I finally get the Coasting in Retirement book finished, I’ll have a whole section dedicated to explaining these differences more fully.
But for now, and again for sake of time, let’s divide all of these advisors into 2 broad camps: those that accept commissions on the sale of securities, like Class A mutual funds, or variable products, such as variable annuities, and those advisor that operate in a fee-for-service model with the management of their clients’ investments. The fee-for-service model may not ring a bell, because if you’ve paid any attention to Hollywood movies about my industry, you would think that all financial people are commission based, because that’s what is always depicted. Think “Wall Street” or the “Wolf of Wall Street” or even “The Big Short”. And while these traditional commission-based brokers still exist, the retail investing world has been moving steadily and inescapably towards the fee-for-service model over the past several years.
The fee-for-service model is fairly simple to understand. You pay your advisor directly, either in the form of a Asset Under Management agreement, known as AUM, or with a financial planning fee, or with a hourly rate. Or sometimes a combination of all 3. No matter how the fee is delivered, it never comes directly from the company whose product was just sold. Any pay is received directly from the client. This helps eliminate a lot of conflicts of interest, particularly when one product pays a higher commission than a nearly identical product. For example, we just mentioned Class A mutual funds. Some Class A mutual funds have a higher commission rate than other funds that do the exact same thing. Or if you want to reference insurance products, some insurance companies offer higher commissions on products you can get for a better price for the client. While the fee-for-service isn’t a perfect model, there’s a reason Hollywood has never made a movie about a scandalous fee-based or fee-only advisor, at least not to my knowledge. Not that it can’t happen, but the movie wouldn’t be that interesting - there’s just less shenanigans that advisor can get his client into when the client controls the pay structure.
Now, what type of advisor am I, you may ask? Good question. The most accurate description would be fee-based. I can only operate in a fee-for-service model with my client’s stock market-based investments. However, as regular listeners know, I came up on the insurance side of the industry, so historically I have handled the risk management needs of our comprehensive financial planning services. But this presents a potential conflict of interest – while any vendor I have ever used will tell you that I have historically ignored commission rates in my career when choosing products – it still can present a bad look if the product chosen has a higher commission rate than a similar product.
So, to eliminate this potential conflict, several months ago I made the decision to bring the man I trust the most in this business, Jay Stubbs, the Director of the Gulf Coast for Providence Partners, as Gulf Coast Financial Advisor’s Risk Management Strategic Consultant. Jay has a 25+ year track record of always putting his client’s best interest first - Jay is certainly no vampire, wouldn’t you agree Michelle? And based on my client’s feedback, it’s worked beautifully, allowing me to focus on my clients’ financial planning and investment management needs. Providence Partners also sponsors this radio show, so obviously we are huge fans.
In our next section, Michelle and I are going to explore this idea of financial vampires in our industry and what you can do to shed some light on them! If you like what you’ve heard about how our business is structured, and that while we are far from perfect, we are committed to our client’s best interests, so if you would like to chat, then please feel free to reach out to us! You can start the conversation by calling 251-327-2124, or you can reach us through our website gulfcoastfa.com. One our site, you can choose to send us a direct message, or you can click on the blue button in the upper right-hand corner to set up a 15-minute introductory phone call on my calendar.
Alright folks, coming up next - There’s always a lot going on in the world! Particularly the world of finance, investments and money. Every week Michelle and I scour what she calls the interwebs for financial articles related to our topic of the day, especially articles that pertain to those in or near retirement. I think we were both a little taken back on how easy it was to find google search results for “Financial Advisor Vampire”! So join us after the break to hear Michelle and I discuss this week’s relevant headlines in our “Michelle with the News of the Week” segment. Stay tuned!
Segment 2 - News of the Week:
Josh: “Welcome back to Coasting in Retirement, your host Josh Null here! As we discussed before the break, every week Michelle and I scour the internet for financial articles related to our topic of the day, especially articles that pertain to those of you in or near retirement. Our job is to help you all understand how these headlines impact you, especially when it comes to your money! Note – if you want to read our referenced articles yourself, we also include the links in our show transcript, which you can find on our website gulfcoastfa.com under the podcast tab. We upload our episodes every Monday after the show airs on Sunday. Without further ado, here’s “Michelle with the News of the Week”!
1. Michelle: Alright Josh, our first article is from the Motley Fool. It’s titled “So Many Hidden Numbers: How Advisors Give Their Clients the Vampire Treatment”. Phew. This article is not kind to advisors that receive commissions for the sale of securities. The article quotes one of your heroes, Josh Brown of Ritholtz Wealth management and the author of several financial books. When Josh was asked, “Does the commission model ever work out for the client?” he responded bluntly: "No. No qualifiers." I’ve learned a ton about your business through co-hosting this show, including that many advisors plant their flag more for marketing purposes than actual client benefits, so I’ve got to ask you – is paying a commission when buying a financial product really that terrible?
Josh: Point out that both good and bad (vampires) exist in both sides of the industry, but the fact is that there really is no need for the average retail investor to pay a commission anymore, there are simply too many low-cost and no commission options out there, especially with the rapidly growing ETF world. Let’s talk about the evolution of our industry. Originally, I don’t know how many years ago but let’s say for certain at least thru the 1980’s, most people in our industry were stockbrokers. They sold individual stocks for a commission. Think the legitimate part of the movie Wall Street, where there a bunch of dudes constantly on the phone pitching investments to prospects.
Now, while mutual funds had been around for decades, I believe the first modern mutual fund was invented in the 1920’s, it wasn’t until the late 80’s and early 90’s that brokers started evolving into more what we recognize today as advisors, albeit the Cro-Magnon kind, but still recognizable. Most mutual funds carried a sales load, sometimes as high as 5.75% of the initial buy in amount. This space started to evolve as well, particularly with a guy that is regarded as the godfather of the no-load low-cost index mutual fund, John Bogle of the Vanguard Group. The evolution eventually led to the creation and rise of Exchange Traded Funds, or ETFs for short, which were by design no-load, low-cost index funds, but with certain traits that differed from mutual funds.
Fast forward to today, and by far the most dynamic and growing section of our industry are ETFs. After starting as relatively simple indexing products, ETF’s have evolved to serve all types of investor needs at a historically lower cost than mutual funds. And to answer your question, Michelle, if an investor can get a lower cost ETF with no-sales load that does near, or even exactly, the same job as a more expensive sales-loaded mutual fund, which one is arguably the more suitable pick for many investor’s needs? That’s why this article is so harsh on commissionable securities products – because there are more affordable options available now.
https://www.fool.com/investing/general/2012/05/11/so-many-hidden-numbers-how-advisors-give-their-cli.aspx
2. Michelle: Next up, US News and World Report. They have a very recent article titled “What to Know About Financial Advisor Fees and Costs”. Not going to lie, I gave up about 2/3 of the way through this article. This thing is dense! If this is what the chapter on advisor fees looks like in your Coasting in Retirement book, I’ll just have to skip it. To be fair, I did recognize a lot of the terms you used when describing the different types of advisors, and more importantly, how these advisors are paid, so to our listeners, I think you should definitely read the entire article. I’ll just rely on Josh to fill me in. This article mentions a recent Harris Research poll that revealed that 71% of Americans have bought a lottery ticket and 24% of millennials said they've spoken to a fortune teller, but just 33% of Americans have spoken with a financial planner, which seems pretty accurate to me…what was your main takeaway from this article Josh?
Josh: Well, first, I agree with you, this is a detailed read. But I would highly encourage investors, particularly those of you in or near retirement, particularly those of you that have never worked with an advisor, to read this article, or find a similar article. It may seem like a trifle thing but how your advisor is paid can have huge long-term consequences on the success of your portfolio. One of the first questions you want to ask an advisor when you are interviewing them is how they are compensated.
Now, if they say they accept commissions, or maybe they’re a hybrid advisor that can accept both commissions and fee-for-service pay, that doesn’t mean you need to stop the meeting and walk away. There are incredibly talented and honest advisors out there that accept commissions as part of their pay structure. But you need to be aware of the differences, especially if this advisor is a regular user of annuities in their practice, especially if this advisor is a huge fan of Fixed Index Annuities, or FIAs for short. Again, I’m not saying that if the advisor uses annuities, this is inherently a bad thing, but most investors would be surprised at how high commission rates are in the annuity world. To be fair, the insurance company pays the commission to the selling advisor, the money technically doesn’t come out of your pocket, BUT, typically the higher the commission, the longer the surrender period for your money, and potentially, the lower the overall performance of the annuity. The other problem is that the commission if paid up front, where are fee-for-service is an ongoing small percentage, so there’s less financial incentive to service your account after the sale is made.
Here’s the bottom line Michelle. By far the most transparent and easy to understand compensation model is the fee-for-service model. The client pays the advisor directly, there are no commissions involved that can be convoluted and hard to calculate, there are no incentives for the advisor to try to find something that pays him or her more for their work because it all pays the same, and it puts the client and advisor in lockstep with regards to the investment performance. Client does better, advisor does better.
https://money.usnews.com/financial-advisors/articles/what-to-know-about-financial-advisor-fees-and-costs
3. Michelle: Well, speaking of financial vampires, I know you have a particular disdain for annuity salespeople that gloss over the important details of the insurance contract, so I thought we should include an article about annuities. Plus, after wading through the industry jargon from our last article about advisor fees, I wanted something shorter and easier to understand. So I took a look at our friends at Kiplinger and found this basic article titled, “Annuities: 10 Things You Should Know”. Just like Josh Brown with sales-loaded mutual funds, annuities also have a well-known enemy that frequently puts them down, Ken Fisher of the independent RIA Fisher Investments. (Michelle – is he the one that does all of the commercials? Josh – yes). Ken is quoted as saying, “I’d die and go to hell before selling an annuity”. The rest of the article doesn’t seem that bad – so why do some advisors hate annuities so much?
Josh: So, first with Ken Fisher, I think it’s fair to offer at least one mild criticism in that I believe part of his fervent opposition to annuities are part of his sales gimmick. I’m not saying he’s being disingenuous, but he knows statements like these will generate headlines, so he lets it rip. The problem is that millions of people depend on annuities for stable, lifelong income – ever heard of a pension? Many pensions are funded and managed by insurance companies. But back to answering your question.
The first thing people need to know is that saying all annuities are bad are like saying all car models from one manufacturer are bad – there’s many different types of annuities designed to fit different client types and sizes. There’s Single Premium Immediate Annuities, or SPIAs, which is Michell’s favorite acronym to say, there’s deferred annuities, there’s Multi-Year Guaranteed Annuities called MYGA’s that function similar to bank CDs, so and so forth. That said, when advisors like Ken Fisher rail against annuities, typically they are referring to Variable Annuities and Fixed Index Annuities, and here is why many fee-only and fee-based advisors don’t care for them – they’re complicated, they tend to be expensive to the client, they usually have a high commission paid up front, and they are often sold without a full understanding of the details on the investor’s part. FIAs in particular are the fastest selling annuity product on the market today, and they do have attractive features, but all too often they are sold through a process that skims over too many details. Listeners, if you have an annuity, or consider buying one, do yourself and give us a call at 251-327-2124, and we will walk you thru what you are getting into without a bunch of sales pitch speech.
https://www.kiplinger.com/retirement/annuities/annuities-things-you-should-know
3. Michelle: Last article of the day Josh, and I pulled it from your website, figured I would make you put your money where your mouth is. To be fair, it’s not really an article, more what I think they call a “landing page”, correct? (Josh – correct). The page is called “What It Means to be a Fiduciary”. Just like with our radio show, I see how you try to educate people on the different types of advisors and why being a fiduciary means, plus you put in writing some of the conflicts of interest we discussed in our show opening. So, what DOES it mean to be a fiduciary? And how does this relate to investors protecting themselves from financial vampires?
https://gulfcoastfa.com/team/what-it-means-to-be-a-fiduciary
Josh: Michelle, great job as always with the headlines, these are all important pieces of information that impacts those folks in or near retirement! Listeners – if you would like to continue the conversation with us, then why don’t you give us a call at 251-327-2124 to talk to me or to set up an appointment, or you can always reach out to us via our contact page on our website, gulfcoastfa.com. Don’t forget to click the blue button in the upper right corner to put a 15-minute introductory phone call on my calendar!
Alright folks, coming up next: Josh’s Crystal Ball and Big Mouth. What have been some of my predictions? Have I been right? Was I ever wrong? How wrong? What do I think is going to affect investors in the near future? We talk about all of these things and poke a little fun at my big mouth. Stay tuned!
Segment 3 – Josh’s Crystal Ball and Big Mouth:
Welcome back! Your host Josh Null here, alongside co-host Michelle. So, I am opinionated, I have strong opinions at times, I would say a radio show host that isn’t probably wouldn’t be very interesting to listen to. And I am paid in my profession to offer professional guidance and opinions to my clients, otherwise what use am I? Just replace me with AI. Sometimes I feel so strongly about something that I talk about it publicly, sometimes I’ll even make predictions, and while I usually proved right, there are times I swing and I miss. Want to hear me eat a little crow? Then let’s get at with Josh’s Crystal Ball and Big Mouth. Alright Michelle, what’s first?
1. Michelle: So Josh, in case you haven’t heard, we have a presidential election coming up soon. I know you have clients that are concerned about the outcome, even expressing a desire to exit the stock market entirely depending on the outcome. I think the word extreme volatility is being used when referencing this particular upcoming election. But you have always held that investors should be political agnostic, especially in the long run. So what proof do you have that investors should not make their decisions based on whomever gets elected to be President of the United States?
Josh: Oh my gosh, I love this question. And I have a totally unexpected answer for you Michelle. So we referenced a financial advisor hero of my mine earlier in the show, Josh Brown of Ritholtz Wealth. Well, Josh recently posted a study regarding this topic that I find fascinating. Let me walk the listeners briefly through the main point of this post. An analyst did a study of stock market performance using which party held the office of President over the past 70 years, starting with Eisenhower’s election in 1953. But instead of just saying how did the market did under the back and forth in-power party during the 70 years since then, he framed his study this way: if an investor put in $1000 in 1953, and only stayed invested in the market during his or her’s party affiliation, going to cash when the other party was in power, what would happen with that $1000?
According to the study, if you only invested when a Republican was in power, your investment would now be worth $27,400 today. Not bad, right? But if you flipped the script and only invested in the market while a Democrat was president, that same $1000 would be worth $61,900 today! That goes totally against the common perception that Republicans are more business friendly, right? Now, stay with me listeners, I may be slow at times but I ain’t stupid, and I know that many of our listeners lean right. So here’s the really fascinating part Michelle. If that same investor had invested $1000 into the stock market in 1953, ignored whoever was in power and stayed in the market, do you know what the value of that account would be today? $1.69 MILLION DOLLARS. I don’t know how more clearly I can demonstrate that it’s all about time IN the market, not TIMING the market.
https://www.downtownjoshbrown.com/p/dont-get-political
2. Michelle: Alright fair enough. So with that said, who do YOU predict will win the Presidential election this November Josh?
Josh: HA! I ain’t touching that one. It will be close. But more importantly to you listeners, you investors, is 2 things: first, we’ve just demonstrated that you should ignore political outcomes for going into or out-of the market. Second, as far as I have heard, neither one of them is making the federal deficit an issue, which means that the US Govt will have to print more money and issue more debt to finance our federal budget deficit, and money is like water – it wants to flow somewhere. So as long as our monetary policy stays the same, more and more dollars will be flow into various financial instruments, including the stock market. Doesn’t mean the market will go up forever or not experience some turbulence, but it’s something to consider. Monetary supply means more than you realize when it comes to the performance of your investments.
Listeners, want to learn more about how we incorporate monetary supply into our investment philosophy? Then we invite you one last time to reach out to us. Call us anytime at 251-327-2124 to make an appointment or find us at on our website at gulfcoastfa.com.
Folks, that’s it for us this week here at Coasting in Retirement! I want to give a huge thank you to my lovely co-host, Michelle Lee Melton, thank you to our show sponsor, Providence Partners, thank you to our awesome radio station FM Talk 106.5 out of Mobile, many thanks to the provider of our show music, local band Sloth Racer, huge thank to the show producer, Mr. Chaesare Gray, and as always my sincere appreciation for all of your out there that have been listening and joining us on this journey. We would love to be a part of your journey as well! Until we talk again next Sunday, have a wonderful and productive week. This has been Coasting in Retirement with Josh Null!
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