Interview With Ron Rhoades: Masters in Business (Audio)

He has been both in and around the industry and a number of capacities, both as a lawyer setting up trusts in the States and other such stuff, running an r i A, running a fiduciary shop, and as a professor teaching financial planning and other things. He's probably best known as a gadfly who has been lobbying Congress, the SEC, FINRA, the Department of Labor. I call him a one man wrecking crew. He, amongst other people, prevented FINRA from becoming the uh S r O for the r A industry.

He has been absolutely crucial in moving the ball down the field for moving towards a fiduciary standard for all advisors or many advisors. This is if you're interested in managing money, running a firm, or understanding the regulatory process and how it impacts investors and brokers and advisors. Uh, this is really a very deep dive into that sort of stuff. Stay with it. It gets more and more detailed and interesting as we go on, and the podcast portion,

as you'll hear, is really terrific. So, without any further ado, my conversation with Professor Ron Rhodes. This is Masters in Business with Barry Ridholts on Bloomberg Radio. My special guest this week is Ron Rhodes. He is a professor at Western kentuck A University where he is chairman of the Financial Planning Program and teaches applied investments, retirement planning, and estate planning. You may not have heard of Ron if you're not in the asset management business or if you

don't work for the SEC. But a little bit of background as to who he is. He was voted Wealth Management Magazines uh most influential person today. That was back in He is the recipient of the Tamar Frankel Fiduciary of the Year award, and he was named by Investment Advisor magazine one of the twenty five most influential persons in the asset management business. Ron, Welcome to Bloomberg Great thanks good to be here. So so that was a little bit of an ambiguous introduction. I want to ask

you a question. For someone like me, you do many different things, You wear many different hats. But when people first meet you and in the conversation they ask what do you do? How do you answer that question? Well, you know, I asked people to think back to to their kids and as they were growing up. Um, kids need to be pushed, uh to develop and and that's why God invented mothers. But but those kids are sent off to college by their mothers. And that's why God

invented college professors like myself. So your job is to push them in the right direction, push them expand their comfort zones, to show them how to develop and maintain relationships other than the relationship they have with their smartphone or their Facebook page, and uh, to get them the set goals and and really think about self improving themselves and and and getting ready for a career. But you you do more than push college students. You push the SEC.

You fished, the Department of Labor. You push Finro, which is the brokerage world's self regulating organization. Let's let's talk little bit about how you found your way from the practice of law into finance and ultimately into academic How how did you find your way into finance as a lawyer? Now, it goes back to college years. You know. When I was going to college, I was working during the day at wal Disney World. I was a Disney character and Uh, I just remember all the time having a book about

stocks or bonds. Uh. This is probably about nineteen eighty or so, tucked away in in my beer costume, and during breaks off stage, I'd be reading it. So you were a bear reading about stocks. There's some there's some ironing. I know. Yeah, that's that's that's neat. Uh. Yeah, you know ours blue and bear Bear and Little John and Goofy as well. Just my my clients used to say that they had a Goofy attorney. Uh, we're a bearish adviser.

It's the same thing. So you're reading about stocks. But how do you make the transition from being a lawyer to to being full on in finance. Well, I was going to state planning and tax attorney, and and I got recruited to help a major financial services company, Uh, attack the four one K market with a retirement planning program and that lasted for about six months. UH enjoyed.

It was glad to see the program kind of in because it involved flying up here to New York and back from Florida, where I was at the time, every week for twenty six weeks straight. But after that, UH, some c p as that I had helped put together their firm from a legal standpoint approached me and said, you know, we're not very happy referring who we're referring to right now, and I said, well, I'm not very happy.

So they asked me to help them interview UH financial advisors in our community, and we did about a dozen interviews and nobody even came close to to meeting our expectations. And then we got together and said, we just need to do this ourselves. We don't want to send our clients here and here. We we need to do it the right way, and we explored eight different business models and ended up forming our own independent registered investment advisory firm.

So that's kind of fascinating. So you kind of it's the old joke about Dick Cheney. You interviewed a lot of people for vice president and finally said there's no capable I'll do it. That that turned out to be true. Um so what then led to the transition to academia. You did that for a number of years. What brought you back to college? You know, if you're a good

financial advisor, you're you're really a good educator. You like counseling and and kind of teaching colleges counseling on mass in essence, so instead of doing it one on one, you're doing it in front of a whole room full of minds. To be most and I always thought i'd get into teaching. When I was in law school. I would run study groups of a hundred people, and you know that the first year students, as a third year student,

I'd be giving them a study instruction. But at the opportunity resented itself and I rushed for it because and I've never looked back, because that the students. It's so great to see them transform, even over the course of a semester, especially over two or three years. And I just love going to work at every day at Western Kentucky University. It's just a fantastic place to be. So so speaking of educating and counseling, in the last minute or so we have you've been pretty active on Twitter.

You've been an active blogger for it seems at least five years. How do you find those mediums um are in terms of trying to get a message out. I'm pretty surprised when I go to industry conferences that the number of people who come up to me and and said that they've read my blogs and and we have a nice discussion about it. Um. I found you through Twitter. That's how I first. You know, I've been running about the fiduciary standards. Yes, yes, I thought it was kind

of a lonely thing. And there's this guy, Ron Rhodes, just scorched earth, destroy everything in his path. I'm like, I have to follow this guy. Do people comment to you about Oh, I follow you on Twitter? I know who you are from that? Oh? Absolutely yes. I I don't really hold things back very much. I'm a little bit on the blunt side when it comes to things like so, I'm just I'm just a big soft bear. Is that what it is? I'm Barry rid Hilts. You're

listening to Masters in Business on Bloomberg Radio. My special guest today is Ron Rhodes, Professor Ron Rhodes of Western Kentucky, University. He is an expert on fiduciary standards, has been a gadfly for the sec Department of Labor and especially finn Roe. We're gonna talk a little bit about that in a little while. Let's talk a bit about the financial planning industry. Where you have lots of background and and lots of

published work. What do you think clients shouldn't expect from their relationship with a financial advisory In one word, trust and and and if you look at trust, it's really got three elements to it. The first is that the advisor before you is a true expert in what they do. The second is they're gonna put your best interests forth and keep those paramount above theirs. It's not about their commission also selling whatever product as the highest um bonus

on it. It's about the client's interest. First, Yes, there are to be compensation that should be reasonable, agree to in advance, transparent, absolutely completely transparent, and and then work under that constraint to go out and find the best investment strategies and thevest best products to implement those strategies

for the client. And lastly, it's candor. You know a lot of times clients really need to hear something they may not want to hear, like spend less money or uh control thyselves in some way, or you know, keep the emotions down, you know, stick with this market that we have conversations with people. Sometimes I'll get emails with people say I have this big inheritance and I want to seed four different hedge funds and whichever one gives

me the best returns, That's what I'm giving my money to. Like, you understand game theory, right, you understand you just gave these guys an incentive to do nothing but throw hail Mary's because if they lose, hey, the odds are against them getting your money. And if they win, they they're not going to be able to put up those numbers again. So you've created a terrible situation. People don't seem to

think those sort of things through. I think financial advices through a lot of keeping clients from making big mistakes and behavioral counseling. Absolutely that. In fact, almost every financial planner I've ever talked to you says, you know, I wish I had a minor in psychology, and and it's that important that that's quite interesting, So let's talk about that. That's one of of things I think the industry is doing right. What else is the industry doing right? And

what else is it doing wrong? Well, I think what it's doing wrong? And where we really think seen things change over the last forty years as we went from this fixed commission structure and abandoned that in nine that was a good thing, but it's been replaced with a whole bunch of variable compensation where people can get paid a lot more money to sell one product over another, and just a ton of conflicts of interest and a lot of hidden fees. Clients have no idea what they're paying.

I have had many a perspective client client coming to see me and they say, you know what, I've never paid my broker a dollar. You know, I get that on the bond side of things, they don't charge me any commissioners bonds. Well, that's because it's it's not you know, there's a difference between an agency transaction and a principal transaction. They're selling you by on is at a markup, not a commission. It's even worse right, No, no, no, it

doesn't show that on any of my confidence. And then when I when I take them through and say here's the commission. Here's the twelve B one fees. Here's the payment for shelf space that the brokerage firm is getting of some amount. Okay, Like it's like it's potato chips in the supermarket if you want to be on the end gap. They're being the supermarkets for that placement. And they're soft all the compensation, and there's other revenue shary

and gifts and the like. And when you start explaining this to clients, they typically get really angry because they thought that this guy was their best friend and it turns out that they were a very good product salesperson. The the old joke is if you want a friend on Wall Street, get a dog, And it's really true, because they're there to do the business of their firm.

And I'm not saying there's anything wrong with that, but it's important that investors educate themselves and find out how that guy who's not charging you for those bond transactions is driving a really nice car and living in a really big hal us and doing it without much training,

and what they do. It's almost as if sometimes when people get hired into some of the berg which firms nowadays, they get training and how to sell, of course, but they don't really get training and investment strategy and investment portfolio management, tax tax efficient investing, uh, all the things that they really should know to be experts, to know where close to be in ANET. Now that is a change from years ago, because I know when I was coming up. Look, I've been in this business for twenty

plus years. I had friends that started at mary Lynch, started at Morgan Stanley, started at bear Stearns, and these guys went through a rigorous six month training program. Do these exist anymore? They have to still be around somewhere, or has the industry given up on training people and it's cfps and c f A s that or where all the training take place. I think for a large

part they went away. And and the old model that you perhaps grew up in, the old party marty commercial, Uh, we make money the old fashioned way we earned it, that largely disappeared and it's now just beginning to get back come back. In part of this because people want advice people, and it's really a lot more complicated world out there. Sure financially tax wise, people don't need just

investment advice. They need financial advice, financial planning, and and that's where you see things like the UH Certified Financial Planning Board of Standards with their CFP certification becoming really priced as a standard for investors. So we've seen the industry change a lot over the past couple of years, past couple of decades. What do you think are the next couple of changes we're gonna see going forward? UH this year is likely to be transformational. Transformational. Now we

know the Department of Labor Fiduciary standards coming. We're gonna talk more about that in our last segment. But what else do you see changing the landscape for investors? Well, the fiduciary Standards is going to change it and in a lot of different ways. So let's look at the longer term impacts of this. There are some things that exist now which a lot aren't you going to go away? If not by the regulators themselves, just from a standpoint

of having a more competitive marketplace. One, fees likely to be gone, okay, payment for self space okay, proprietary funds a lot less, a lot less of that. How much of this is driven by the massive inflows we see into Vanguard. That's just in the last minute. We have Vanguard is sucking up all the oxygen the room, and all the active managers out there seem to be flailing.

Is that a competitive factor that's driving this to some degree? Yes, because once you start eliminating all these hidden fees and you get down to lower fees, all the academic research shows lower fees means higher return for investors, and investors to starting the catch onto this, I'm Barry Ridhults. You're listening to Masters in Business on Bloomberg Radio. My special

guest today is Professor Ron Rhodes. He's from Western Kentucky University and a specialist in various forms of financial planning and the rules and regulations and standards that governed the different participants in the market. Let's talk a little bit about this and and and start out really broadly, put on your lawyer's hat and explain what is it that a duty of care is, who's it owed to and

why is this important? Well, for financial services, what it means is you have to have a certain level of expertise and apply that expertise uh in designing investment strategies and selecting investment products. And that's part of a duty of care of the fiduciary standards of duty care. The other part is the duty of loyalty, which means you've got to keep the client's best interest paramount. What's interesting is that most brokers who are not acting as fiduciaries

don't have either of these duties. They're not obligated to have any sort of expertise that when they're not obligated to with the clients uh interest. Fact, they're just governed by a suitability standards something that's far less. It's amazing in this world that we have so many service providers that have a duty of care and what the suitability doctrine really does. It was adoptive way back in the earlier twenty century when the whole theory of negligence was

developing in the law was. It basically was enacted because we didn't want to hold brokers responsible for stock recommendations when they were only executing stock trades and listen, stocks go up and down. You can't hold people responsible for good faith bad choices. But suitability is such a low standard. I used to call that don't sell I p o s to grant MS standard. But but there's a little

more to it. Explain exactly what suitability means and how much different that is than fiduciary Suitability essentially says, don't sell things that explode that you know we're going to explode, and perhaps for elderly clients, don't even sell firecrackers. All right, But suitability is basically says you don't have a duty of care. All you have to do is make sure that this investment could be held by this particular client.

It doesn't have to be the best investment if it's in a taxable account, it doesn't have to be tax efficient. It doesn't have to be a low cost investment. In fact, it can be a very high cost investment. Yeah. And from the standpoint, it doesn't even require you to think about an entire portfolio together and how you can minimize the risk in that portfolio. It doesn't even require the application of what we've known for sixty five years now,

modern PORTFOLI theory. So is it fair to say suitability is can be summed up as try not to be reckless? Is it? Is it that lowest standard? I think it actually allows people to be reckless. I think it's I think it's below that point, so recklessness, all right? It was reckless, but it wasn't unsuitable. Gross negligence perhaps is is outall and a suitability is really a standard that it's very difficult to actually say what it is. It's so vague. So so let's talk a little bit about

the regulator in this space. The brokerage world has a s r OH, a self regulating organization formally NASDAC or any SDR. Now it's FINRA. You have been a major thorn in their side, mostly about this suitability standard and their opposition to the fiduciary standard. Tell us a little bit about your your relationship with FINRA. Let me take this to the back in night Senator Maloney who was the author of the Maloney Act that led to the

creation of any s D which is now FINRAD. He said, the purpose of this s r OH is to create an organization that will gradually, over time raise the standard of conduct for those in the securities business to the various highest standard and the law, in other words, raise it to the fiduciary standard. That vision has never been put in place. You know, if you go back to

the forties, uh findra it's its biggest accomplishment. It wrote, was uh not was preventing the separation of brokers from dealers. All right, well, that's a conflict of interest situation. They basically led to this huge conflict of interest in financial services.

They maintained that when they adopted their first rule book in even though they acknowledged in their first newsletter that brokers are often fiducaries to clients, that they have a relationship of trust and confidence with there's nothing in the finer rule book. Now we're back then this has the word fiducry in it. So in the last minute we have in this segment, there was a time not too long ago when FINRA made a play to take over managing or supervising um the r I a world, the

registered investment advisory world currently supervised by the SEC. You pretty much were a one man wrecking ball that stopped that. Tell us a little bit about how that happened. I think there were a lot of people involved in that

effort to stop them. It was a bill that's coming out of the Senate and that was proposed, and there was just a lot of opposition from consumer groups for myself but many others to that to basically say, listen, we shouldn't be rewarding FINRA by giving them oversight of investment advisors. Yes, we need more oversight, we need more inspections, but this is not the way to do it. I'm Barry Ridhults. You're listening to Masters in Business on Bloomberg Radio.

My special guest today is Professor Ron Rhodes. He is an expert on fiduciary standards and legal obligations that advisers owe their clients, namely the investment community. Let's talk a little bit about the fiduciary standard. Back in two thousand and eleven, as part of the Dodd Frank Rules, the SEC had a research a um put together a study on the appropriate standards for brokers and advisors and all sorts of people in the industry, and they put out

this long research report. I actually published it on the blog some time ago. Uh that specifically said, and I'm quoting, all financial advisors and stockbrokers should be placed under a uniform fiduciary standard. First, what does that mean? And second,

why hasn't that happened? Back in two thousand eleven that that study came out from the SEC staff, and we had spent a lot of time with the SEC myself and many other fiduciary advocates, educating them about the fiduciary standard and why it was so important and what this would mean if it was adopted, And it came out with what I thought was a pretty strong report on it, very very strong. Yeah, you can you can tell by the pushback to it immediately from the rest of the industry.

The SEC commissioners did not sign off on. That is not signed by any SEC commissioner. Uh. Kind of an indication of the split and the commission that has persisted for probably at least a decade now. UH. But you know now that the situation at the SEC has quite changed. You have you always have staff turnover, and the senior staff at the SEC, they all worked on the Wall Street before, uh, and they a lot of them worked

at the SEC, went to Wall Street, came back. A little bit of revolving do going on tremendous And one of the interesting things is, and it doesn't happen for all the SEC staff, but but it does happen generally between New York and Washington. You leave Wall Street, you get a bonus to go work at a government agency and a promise that you'll have a job when you come back, Does that influence what you do in Washington? Certainly does. Yeah, there's no way around the fact that

it's going to influence your decision making. And right now the chair of the SEC is surrounded by senior staff that really hold an allegiance to to Wall Street and don't want the fiduciary standard. M that's amazing that. Um, so let's talk a little bit. You you reference the fiduciary standard in an earlier segment, but let's let's get into that again. Explain exactly what the So you're an investor, you're you open a brokerage account or you open a

an account with an advisor. What should the fiduciary standard mean to you as an investor? First, that you're dealing with an expert, someone who if you say I want to prove in portfolio, that's what they'll give you. And and and generally speaking, this in a assumption that that's what you want, although not all advices live up to it.

And and second this what really makes the fiduciary standard distinctive is the duty of loyalty, the duty to keep your best interest first paramount best interest of the client over that of the advisor and the and the only way to do that is to avoid conflicts of interest. They say, Hey, we agree on how much I'm gonna get paid, I'm going to do my best to not receive any third party compensation whatsoever. When you say do your best, you know someone's giving you a check, you

know it. It should be pretty easy to not get paid by anybody but the clients or am I wrong? Generally it's easy. But for example, I'll go to a custodial conference, uh that I use the custodian for my client funds, and I don't pay for the education at the conference. I pay my own way there the hotel, but they give some free food and and even some free entertainment and up in the in the in the boothroom.

So that that's a minor conflict of interest that I would say, it's not going to influence my judgment at all. But if I went to twelve of those conferences a year of mine, right, So so you have to there aren't small conflicts, and everybody has, but it's avoiding those major conflicts. But even if you don't avoid a conflict, then this is the key to the duty of loyalty. A lot of people out there, including someone Wall Street lawyers, they think that all that's required is you have to

disclose the conflict of interest. But that's not what the fiduciary laws. Interests must come first. And so having a conflict of interest is a breach of a fiduciary duty. You have to cure that breach. How do you do that? You disclose the conflict and its ramifications to the client. You do that affirmatively. You make sure the client understands, and that's a duty that's subjectively applied. You get the clients informed consent. And here's the key. No clients ever

going to consent to be to be harmed. One would help. So so if you say, well, I'm going to get an extra fifty basis points when I sell you this on an ongoing conversation, as opposed to the exact same product elsewhere. That course, by the way, when I've reviewed portfolios, I've seen people with SMP holdings at like one in

a quarter internal expense or one percent. You can pick that up at a vanguard or a dimensional for almost nothing, eight bits, twelve bits something in insane six basis points. How can anyone justify an index fund with a one internal expense rate. You can't. You can't, and there's way of doing it. So so we talked about the the

SEC study and how they proposed a uniform standard. That hasn't happened, but the Department of Labor has now stepped in and said, retirement accounts are a form of compensation. We cover compensation, and therefore we're going to cover the standards for people who are managing these because essentially they're managing compensation and therefore we're implying the fiduciary standard. How

did that come about? Well, Assistant Secretary Phyllis Borsey over at the Department of Labor, who are really admire When she came on board about seven years ago, she asked her staff what are the things that we can do to improve retirement security for for Americans? And they came up with a list and some two of those things have already been implemented. Disclosures to plan sponsors and disclosures

to plan participants. They've already had a huge impact. Once you disclose all the fees and costs, attends to lower things. I can't by the way, I can't tell you how often we look at a four one K plan and the answers, who the heck put this together? Oh, the boss's brother in law did it. That sort of stuff has really tailed off because there's an obligation on employer to they have a food dociary standard. If they're offering

a four one, they do, and it's uh. They need employers that they're not in the business of of creating portfolios for their employees. They run a business, so they need a trusted advisor. And if they don't have a trust advisor, the employer is the one who is on the hook. But under the suitability standard, if some broker recommend it, here's twenty funds and all horrible funds. The brokers down on the hook, and that's that's a real problem.

Not usually the aforementioned brother in law. That's department Well, Department Labor is in the middle of fixing this with something called its conflict of interest rule, supposed to be finalized, come out later this spring and hopefully hopefully implemented by the end of two thousand sixteen, and it's going to basically say, if you're providing advice to either define contribution plans that are government by aresa like four one K plans some four three bis or if you're providing advice

to IRA accounts, then you are a fiduciary and and all these fiduciary obligations result. Imagine when going from about twenty of of publicly traded investments being subject to a fiduciary standard, mostly in defined benefit plans and endownment funds, to somewhere between forty that's a tipping point. Yeah, that's massive. I will tell you in my own office, outside of the four oh one case stuff I would say about the portfolios are in i ras, people have rollovers they

set up there. That's a huge, huge change. So about half of the total assets under management are going to be governed by a fiduciary standard by the time this year rolls around. Can anything stop this rule from being put into effect? Well? Wall Street is really heavily, heavily alarming in Congress to stop it. They didn't succeed in the budget negotiations back in December. That was really their biggest chance. Uh. They're still trying desperately to get some

bills past. Uh. I'm going down to d C right after this to to to meet on Capitol Hills. To try to stop some of that, A lot of this a D organizations that are pro fiduciary supporting the rule. I think it's got a really really good chance of getting through this year. That that's that's really quite quite amazing. For the life of I've I've seen all these arguments against it, which will come down to, hey, we're gonna

lose a lot of money and fees. But without me being glib or snarky, are there any credible arguments against the fiduciary standard? Not? Not really. You know, it's not just me because I look, we both went to law school. You know, you know what mood court is. You have to adopt the other parties argument and argue on their behalf. You have to be able to switch hats, and you cannot understand your own position unless you can argue your

opponents position. And I feel like I have a blind spot with this because, for the life of me, I cannot find a single credible our argument other than we're gonna lose a lot of of fees if we go from suitability to fiduciary. Uh. You know, I would say this, there's there's always a tension in our society between one one body of thought that says people have to have self responsibility for what they do themselves. And there's another body of thought that says, well, wait a minute, the

law needs to protect people. Sometimes it needs to be a little paternalistic, and people hate that word paternalistic. Uh. And financial services, really, the question is does the average American does almost any American can they? Can they navigate this complex financial and investment world themselves when people are trying to sell some really lousy stuff to them? Uh, my experience that is maybe one in a thousand. We've been talking with professor Ron Rhodes of Western Kentucky University.

If you enjoy this conversation, be sure and hang around for a podcast extras where we keep the digital tape rolling and continue chatting about all sorts of things. Be sure and check out my daily column on Bloomberg View dot com. Uh. Follow me on Twitter at rid Halts. I'm Barry rid Halts. You've been listening to Masters in Business on Bloomberg Radio. Welcome to the podcast. Uh, this is the portion too loud. Welcome to the podcast. I

have as a my special guest this week, Ron Rhodes. Ron, thank you so much for coming all the way up from d C and doing this. I know you're heading back down to d C. Um, you're gonna you're gonna meet with a bunch of UM organizations and people on the hill about the fiduciary standard. Who who's on your hit parade? Are you're gonna be seeing the Consumer Financial Protection Board? Are they on your your list? Sometimes they are,

but not this trip. Typically, uh, it's uh the Senate Finance uh and Senate Banking Committees, House Education, Workforce Committee, Senator Warren she as part of your yes in the past. Uh, not not on this trip. You know, there's so many senators and representatives theory every trip we in, every trip to d C, it's usually seeing you know, about five a day, either them or their staffs, their Legislative Council, their General Council, or the committee staff, very influential committee staff.

But also you know, while when there, we typically reach out to some of the organization's uh uh visits to the SEC. There's still some stuff going on there, right. Does it feel like the tide is shifting on this on this on this fight? Is it? I feel like it doesn't seem like an uphill battle anymore? It seems like this is going to happen. Definitely. I would say once we got past the December budget negotiations, I don't see anything on the horizon that is a hurdle to

this being implemented. Is not to say that the most intensive, coordinated lobbying effort that Capitol Hill has ever seen is not occurring as we speak right. Oh. Absolutely, every time I go to Capitol Hill is like, Wow, we can't believe it. We've seen forty fifty people on the anti fiduciary side, including the CEOs of some of our big

investment banks, making personal trips down there in the lobby. Well, they got stock options at risks, so they they see forty or fifty of them for every one person on the pro fiduciary side, and they say, we're very happy to see you. Well, I've been actually going back and forth with the sene Warre and staff of having her as a guest, and I would love to discuss this with her the next time you're in your her office, Point her to this podcast, get her down in New

York for this um. So let's go over a few of the questions that that we missed during the actual broadcast portion um and we were all over the map. So let's talk a little bit about the proper roles of advisors. I never got to that question. You mentioned expertise and and fiduciary standard, But a broker and an advisor, how do they operate as counselors to investors? What should their proper roles be? I I think that a good financial counselor is a steward of not only wealth, but

also the client's hopes and dreams. And and when we think about wealth and the accumulation of wealth, that's not an ends, that's a means to an end. And what do you do with wealth is you buy things like financial security, or you buy time that you can spend a better develop your relationships and maintain relationships with family and friends. Or or you explore the world with it in some way, expand your horizons. Or you give back to the community in some way. Uh, And and all

of those things. If you ask what is the purpose of all those things, it all leads the one thing, happiness. And and not happiness as a destination, but happiness every day along the journey. And so I really think financial advisors do that. They they are stewards of clients happiness. Quite quite interesting. You know, we never got to talk about the robo advisors. Any thoughts about that. That that's kind of an interesting, uh um change over the past

couple of years. I think it was a change that was developed from software that financial advisors have been using for over a decade for rebalancing portfolios tax efficiently. Also software that has been used to gather client information more efficiently, and also report out, especially portfolio reporting software online updated

every day. And you combine those three things with a slick interface, and you adopts a mass market market methodology to it lower the fees, and and that's essentially where a robo advisor is. Uh, it's been an interesting development. I'm not sure how long it's gonna last. Uh it'll last till the next major financial crisis when people don't know what they have to do with themselves. Look, well, it depends. Uh. You know, we talked about this the

other day in the office. Asset allocation is a commodity product. It's it's inexpensive of free, but advice, and good advice is fairly expensive. I don't know how you can set a person's ouset allocation without having a personal conversation with them because it's about risk tolerance. And a lot of times you'll see the robo advisors do these online risk tolerance questionnaires. But they're helpful, they're helpful, but they're limited,

the inherently limited. You cannot design a risk tolerance questionnaire, UH that has enough questions to really fire it out where someone needs to be as opposed to what their tolerance for risk is. It helps you, but people's need to take on risk is something completely different, and and that's set by a lot of different factors. You need to have this hand holding with the client to ascertain

their need for risk. Yeah, investment management, you know, I tell my students I can train you to be a great investment portfolio manager in a year, but if you want to be a great financial planner, it's going to take you five to teen years. It is that? Is it just a matter of life experience and no the sort of cycles clients go through or is it something something else? Financial planning is both broad and what it covers tax planning and state planning, insurance issues, UH, maintaining debt,

paying off debt, major expenditure is planning. So many people make huge mistakes in that area. Uh and investments is only one part of that. So you have this very broad area, but it's also pretty deep. And so the only way to start connecting those dots, you know, if you do one decision over here, how does it affect something way over here is through experience, and and it's gonna take five to ten years of experience, I think for most people to become an excellent financial planner. Hmm,

that's that's fascinating. I'm glad I asked that question because we uh we missed it. UM a couple of questions. We talked a little bit about UH FINRA. One of the things I wanted to ask about was the so called hybrid model that seems to exist at some of the big brokerage firms. So they have a suitability standard most of the time, but to sell certain products they use a an r A, so someone's both an r A and a broker. So sometimes it's a fiduciary standard

and sometimes it's just suitability. How do you resolve that that conflict of interest? You can't. You can't not for the same client if you're if you're trying to be a fiduciary to a client and at the same time in trying to sell them something. No person can wear two hats at the same time. It's it's an old adage that goes back really millennia. Basically says no man can serve two masters that one time, So you cannot reconcile those functions. You can also remember under fiduciary law,

fiduciary is a status. You become a fiduciary to that client, which means the entire relationship should be subject to that fiduciary can't be a part time thing. It has to be correct and and and if people get sued, if if brokers get sued, they don't get sued under the Advisor's Act and the way the sec applies that they get sued under state common law and how that's applied. And fiduciary status attaches to the entirety of the relationship and and it really constrains what you're able to do.

So wait, if if someone's working at a big brokerage firm that is a hybrid model where some of the work they do is brokerage and commission based and some of it is are i a fee based you're saying you really can't have both standards with the same client, because if they sue you, your brokerage behavior is going to be governed under the fiduciary standard. Is that what happens in certain states? Am I hearing that right? That is that is likely to be applied in certain states.

The rules are not the same in every state the way the common law has developed. Of course, you're you're being sub it to arbitration here too. That I was about to ask that. So if you have the arbitration um agreement, so really that's the way out? Is that a way out of the arbitration agreement is to basically say, hey, I'm subject to arbitration rules, but there's a conflict because there's a fiduciary standard here, and therefore you're out. I haven't seen a lot of those cases. One would think

that's a ripe area of for litigation. In fact, our complaint of breach of fiduciary is the most common complaint in arbitration, but but not that many of those make it forward because you have to overcome this threshold is the person of fiduciary, then you have to apply the

fiduciary standard. One of the big problems in arbitration is is arbitrators are trained to do what's fair, and in essence, they're trained to ignore some of the procedural hurdles that it takes to get into arbitra to make a lawsuit under the thirty four Act, the Exchange Act, and they're trained to do what's fair with clients. But that application of fairness actually works to lower the fiduciary strict the strictness of the fiduciary standard in the way it's applied.

How is that well, the fiduciary standard says, for example, when you have a conflict of induct you have to do all these things, and even then the transaccident you propose to a client must remain substantially fair even with informed consent. Well broker's the arbitration process. A lot of the arbitrators come from the industry, but they don't come from the r A side of the industry. They come

mainly from the broker side of the industry. And if you haven't operated in a fiduciary environment orhere, you have not studied fiduciary law and what it requires and why fiduciary standards are applied. Your perception of what is fair is going to be dramatically different. Take a look at William Cohen's um work on the arbitration issues with FINRA.

He's absolutely been brutal. He and I know that they've changed up some of the things they've done, but if you look in the ninety nineties and the two thousand's, it was not a pleasant situation to be a planiff in. Even if you were egregiously ripped off, it wasn't a place to go get justice. And Cohen just scorched earth columns on this, both here at Bloomberg and elsewhere. Um. You read some of his and it's like, how is

this even allowed to exist? The New York Times just had a massive series on the problems with arbitration and how inherently unfair it is and how biased it is. Not just in finance, but any industry that has a arbitration clause they're running the arbitration process. It's very industry friendly. Arbitrators come in because they want to be rehired over and over again. It's amazing that this has developed the way it has. Yeah, we need to do away with

mandatory arbitracition, there's no question about it. Wow, that that and what are the odds of that happening anytime arm soon? The SEC actually has authority to do that. But who controls the SEC? It's five commissioners, three three from the party that controls the White House to from the opposition party. And like you said, there's a lot of a lot

of influence from Wall Street over the SEC. And it's really gonna take an extremely strong SEC chair and two at least two commissioners who are also extremely strong to to really start protecting consumers instead of protecting Wall Street in finer quite quite fascinating. So there was an article in the Wall Street Journal earlier this this month that

specifically talked about the outflow of brokers two advisors. Have you noticed any trends in the industry about people leaving the money center banks and the big brokerage firms and either going to independence shops or gonna our a advisors where they're is a fiduciary standard? Hey, what's what's going on with that? Why is that happening? And what does this mean for investors? Uh? You see that and you see it accelerating. I think there's been several reasons for that.

One is there's there's firms out there that are roll up firms we call them, that are actually recruiting brokers out of the wirehouse environment that the good teams. Uh, and they are fostering the process of getting out beyond that. As the article mentioned, a lot of the ties that they have in these deferred compensation packages are going away. Uh, and that's really gonna give brokers the freedom. Uh. When brokers do leave, about of the clients typically follow them.

That's pretty healthy. Yeah, it's not to say that there aren't fights about that, but uh, they end up with about eight of the clients on average. That's a pretty healthy number. So despite all the anti solicitation provisions that you see and brokerage broker firm broker agreements UM, a lot of the clients are following them. I bet, I bet the average listener is not familiar with the broker's protocol which governs the process of hiring and recruiting brokers

from UM major brokerage firms. Talk about that for a second, if you if you would, well, I was designed to

eliminate the lawsuits that were flying between brokerage firms. And there's about four hundred brokerage firms that have signed on to that agreement, and for the life of me, I can't imagine why any investment advisory firm or even a smaller broker dealer who wants to recruit would sign that protocol because it's basically say, Okay, we get this team, we have to pay you some money and and that's how we resolve it. And and if if a team from a wire house wants to go independent, they can

do that. They can start you on firm and go independent. Nobody's gonna pay for their clients. They just take the clients perhaps with them. So the way i've I've read the protocol rules are, if you hire somebody from a brokerage firm, here are the rules that the brokers must file. They can't take any documentation out with them. It's like a whole run of things. They could take names, email addresses, phone numbers, but in theory they can't take account numbers.

It's kind of crazy, but it means when these people leave, there's no litigation. So to some degree it encourages or allows brokers to go without causing a lawsuit or a fear of a lawsuit from where they land. If they join another brokerage firm that's a member at the protocol, but a lot of them are going independent and not going that way, and that's where you still see the litigation. So this is not for the benefit of the investors. This is strictly for the benefit of the broker. It

hurts the investor. And and here's a better a way of explaining why why does it hurt the investors? Well, what happens is your broker leaves, you want to follow them. The broker since transfer forms back over the broker firm is upset about this. They'll slow down the transfer process, they won't return calls. The client is not being served

in the middle of all of this most of the time. Yeah, then the old firm is still calling the client trying to establish a relationship with another advisor at that firm, while the other broker who left is is out there also trying to deserve the client but can't get information. And it's just a mess for a client to be in. So what what should be that what should exist instead of this protocol? What's the proper way for this to happen?

I think the solution is to recognize that financial advisors have investments in these client relationships just as much as firms do. And perhaps this client relationships should not be owned by the firm itself but ought to be shared with the financial advisor. And if a financial advisor leaves, whatever clients are taken, the financial advisor has to remit part of the fees from those clients for a certain

number of years. But if those clients stay with the firm, the firm has to pay for part of that client relationship over to the financial visor. That's a fair way of doing it, and and it eliminates all this litigation. I can't imagine that ever happened that that that's amazing. Um. So as we see more people exiting the brokerage world, to the to the r I A side of things, to the fee only advisor side, that also is going

to drive more assets into the fiduciary standard. That's fair state, absolutely. And advisors are leaving because a lot of times that the brokers firms then being sold told push this proprietary mutual fund, or push these bonds out that maybe long term bonds, or push this investment i p O initial public offering. The greatest commercial was the Schwabs put a

little lipstick on this pig. I remember that. That's got to be ten years ago when it stayed with me because you recognize those people if you worked in the industry for any length of time. It's like, I know that guy. I watched people stand in front of the room and say something similar to that. It was quite amazing. There's really a difference between what brokers want to do. Most individual brokers want to do the right thing for

their clients. Most brokerage firms are worried about their top line and bottom line, and and it's really this this huge disconnect there, that's a tent, that's an inherent tension between the employee and the employer the investor right, and it's going to get worse with the d O L role because the d O L roule says individual advisors cannot be paid more to ending on what they recommend, but at the firm level, the firms can still receive more.

And and this this disconnect is going to become a much bigger And the result of that is brokers are not going to be happy when they go to work, and they want to go someplace where they will be happy going to work, where they will be on the same side of the table as their clients, and they'll enjoy working with their clients and in a more or less conflict free environment, put them on the same side of the table as a client and not have so.

One would think market forces would have forced this to take place decades ago, but it really hasn't happened for a long long time. I mean this, this, this tension has existed for a while, and yet there's a certain comfort level with big name brand ferns who have a legal fiducial obligation to their shareholders, not their outside clients.

I was at a a conference of large firms are speaking at it a couple of years ago Rotten Tomatoes, and I was talking about their need to evolve UH and how they could evolve to embrace the fiduciary standards, set up different divisions and the like. And at the end of that the first question was, but but run, we have a fiduciary duty to our shareholders. And my reply to that was simple and straightforward. Yes, you do. Your market share as a large firm is going down

every year. Every day you keep up this trend, you won't have a firm for your shareholders. If you have a fiduciary duty to your shareholder. You have an obligation to change who moves by cheese people. This is this is not that difficult. Did it resonate or they still stuck in the look, if anybody's stuck in the quarterly dash for profits, it's got to be Wall Street farms. Did was a glimmer of recognition from any of the

farms because, by the way, these aren't dumb people. These are I've met with, spoken to, interviewed a lot of these folks. They're wicked sharp, they're very smart, and yet it seems this is an issue that's a blind spot for a lot of them. It's it's hard to take a salesperson and adopt a fiduciary culture, and a fiduciary culture needs to be driven from the very top of the firm. And and there's such a big difference between a sales culture and a fiduciary culture. It's a big transformation.

But I will say this, just over the last couple of years, we have seen some large firms adopt fiduciary platforms, some of them kind of halfway. We still have some conflicts of interest, but we're gonna eliminate bost of them. One firm, one platform, and one firm is almost completely conflict for it's an asset under management using E T f s, no proprietary products. Uh that has that firm has a history of not doing underwriting. But it's a

fairly large firm. So I see the movement, but it's not to use names if you want to use names, all right. Uh so you know, I see the movement, and I see that they were recruiting a lot of the firms are recruiting individuals to teams now that the newer teams that the younger brokers are are forming. Teams are financial planners and entrepreneurs and uh those who go out and get clients and those who help run run the portfolios. Uh, much more fiduciary base, much more asset

on the management base. Uh So there's some happening. But if you want to, you can't do a part way. If you do a part way, you're just you're just going to continue to see your market share shrink. So so I've drank the kool aid. So I it's hard for me to get back into a brokerage head mentality. I spent the first half of my career for us, not a trading desk and then as a strategist at a brokerage shop. So flipping to a fiduciary side was really a very easy transition for me. It's really hard

to go back to that old way of thinking. But I would imagine at the biggest shops in the world, the Merrill Lynches and Morgan Stanley's and ubs is, isn't it so much easier for them to manage a fiduciary platform. You would think their compliance overhead and the costs and the arbitrations and all that stuff that practically goes away.

You don't have to worry about guys running around doing stupid things, all the things we've seen, all the big scandals, the I p O spinning stuff, the after hours market trading stuff, the mutual fun timing nonsense, like everything about all the major scandals we've seen over the past decade

or two outside of Bernie made Off. Had there been a pretty straightforward the only r I a fiduciary standard, all that stuff practically disappears, and the administrative and and compliance call us for these Look, if you have ten or advisors, that administrative compliance overhead and legal overhead is monstrous. You get rid of that incentive. Granted, your fees are dropping dramatically, but your costs are dropping much more dramatically. Or am I just naive and I've already drank from

that from that bowl. If you get away from the door registrant and you go to a strict fee only, conflict free environment, the amount of complaints falls dramatically. Your your liability insurance per per advisor goes down dramatically because it's just not that much exposure. As you said, your compliance cost fall. You still need compliance systems, but they're set up differently, and and really the only way for the wirehouses to make this transformation is to really create

units of feel only advisors and only. You're only going to be a registered investment advisor. You're not gonna sell any products. We're gonna set up some Chinese walls when it comes to, for example, buying bonds, uh, in buying it out of our own inventory. UH, we'll have a different trading desk that surveys the universe, including our offerings. So that you really need to to take a look at your structure and pretty much commit to having a

completely different division UH. For these people to work under. Are any of the big firms experimenting with their own all right, let's set up a skunk works project project and just do an r I only fiducial only division, because that's where the wind is blowing or has has no one tried that yet? I think there are teams that are doing that in firms, but I haven't seen

an entire division set up that way. One one would think that that sort of experiment is look for guys like you and me, this has let them keep doing it wrong. It just means more more clients, more assets, more advisors are coming over to our side of the street. If I was a wirehouse right now, I'd be doing what the roll ups are doing. I'd be buying registered investment advisory practices that be taking the best of those practices,

forming a large r A firm out of it. I'd be transitioning brokers out of the current environment or the dual registered space, over to this feel only are a only space, uh, and allowing that to happen. Allowing this transition to happening, giving those people who say I don't like this brokerage environment anymore a place to go. And there's a little bit of that going home, But it's not as pure as I would I would say it needs to be, and it's not promoted as much as

it should be. It's tough to get a leopard to change their spots, and it's tough to cannibalize your own business, you know. Not a lot of companies have that ability to engage in creative destruction of their own model. I used to love watching Apple I'm out with a new version of the iPod every year in the two thousands that pretty much destroyed the previous version. Wait, why am I gonna pay five hundred for this when half as

much money I get twice as much storage. And every year they would do that, they wouldn't just introduce something at the top of the line. On the bottom of the line, they would destroy Not a lot of companies have the long term perspective to say, we're gonna destroy part of our own business because it's going to be so much better for the rest of us. Look at what they did with the iPad and then the iPhone. Once they went to the big iPhone, they started losing

sales on the on the iPads. It's it's fascinating that the finance industry that funds. All these companies never really brought into that approach. The typical wirehouse firm on the brokerage business wants to make about two percent a year, two percent a year, two percent a year of the assets that they manage. That's not going to happen. That it's not gonna happen under a fiducry standard. That that's pretty uh stiff. The I think of our I as typically full service I as is one percent shops and

sometimes a little cheaper. And the way you look at justifying that is, Okay, this is gonna be a better portfolio than you're gonna have access to. That will cover a third of your fee, and we're gonna talk you off the ledge when things get really bad, and that'll justify your fee. And by the way, here's all the planning, the wealth transfer, the estate planning, the generational sale of a business, all these different things that that a full service are I A firm offers that helps to justify

their fees. But you can't really justify more than one percent if you're a fiduciary. Two percent is really a stiff fee. Yeah, for any for any substantial sized portfolio, two percent is really getting up there. And what's interesting is the feeling advisors they're prevailing in the marketplace. Just's not enough of him right now? Is that true? There's not enough? The only advisors there are about fifteen thousand as far as we can figure out, the only advisors

out there. Uh, there's a lot more r A s. But a lot of them sell insurance products. They focus insurance or is the focus the investment or or a little of each. Probably the majority of it is focus of insurance. Because the state securiteous regulators said, listen, if you're gonna go out and sell a equity index anuity to some morning you're telling them to cash out of their UH account or whatever, you have to have be an investment advisor to give that advice to cash out.

So they get the investment advisor license to then turn around and sell some annuity problems insurance license and insurance is wildly profitable as a salesperson the entire I would not want to be owning insurance company stock if I was a stock picker right now. Really, well, I know the first use premium, almost all of that is commissioned pretty close to it, and you've got variable nuities have very very high call structures and very high ongoing compensation

and equity index and nuities. Some of them paying ten commissions are more. Uh. You apply a fiducry standards of this, and you create this, You create this army of purchasers representatives and kind of what you're alluding to, it's gonna it's gonna cut the asset managers fees dramatically. Asset managers are coming out with more and more products every day, four fee only advisors, but the fees and costs have to be transparent and they need to be a lot lower.

And the asset managers, some of them are realizing this. Some of them are obviously stuck in quicksand some people have been calling this the Vanguard effect that whatever sector Vanguard plows its way into, in general, the fees tend to go down because Vanguard is so inexpensive. We see something comparable with Dimensional Funds. I had David Booth here is the CEO of UM of Dimensional Funds. We also

had Bill McNabb from Vanguard. But there are another shop that's very inexpensive, and any space they go into, their competitors sort of see their their fees drop it and now, I think the robo advisors they've done two things. They've helped drive fees lower, but they've also made people realize that sometimes you need to speak to a person if you have anything more sophisticated than here's a quarter million dollars. I want to invest this for the next twenty years.

So are we going to just continue to see fees come under pressure both for products and advice or or what does the future of that area look like. I think the investment fees will come down, and I think what we're gonna see is a split between investment advice, which degree can be commoditized at least it's scalable, and and finding interplanning advice, which really is not scalable. It's very time intensive, it's expertise intensive. Uh. Yeah, you can

have basically the professional services model out there. We have a lot of junior partners, a lot of associates, and you give advice that way, and you take some of their fees, and the senior partners make more money. A professional services firm environment like a law firm, counterm and and and the top senior partners may make a million a year. But in a financial planning firm, but not ten million a year because they get they're just great

at selling the high net worth clients. That's going to disappear. I mean, I I see exactly what you're saying. We've been watching this take place now for how many years. In the nineties, I was saying to people who were brokers, you should really think about moving to a feel only thing. This whole broke re universe is going away. But here it is. It's almost twenty years later, and they're still

the biggest, most powerful opts on the street. So has has my forecast about this all moving to feel only been wrong? Or is it just taking longer? And it's eventually going in that direction. But you're fighting huge entrenched forces with massive marketing budgets. There's a huge amount of

marketing going on there and that's hard to overcome. But I think your forecast is right because it's been happening gradually and and right now the investment independent investment advisory firms, independent broker dealer firms are going to have as much market share next year as the Wall Street firms, the wirehouse firms are in terms of what as much market assets on the management So you're talking about trillions, trillions of dollars right now. Now you hit the Department of

Labor roll right, what's that going to do? One is a lot of the old brokers are going to say, I don't want to deal with this. I'm out of here, I'm retired. I don't want to give up. Oh you mean they're just done, They're going away. You know, I got all these clients with IRA accounts. I don't want to practice on the fiduciary environment. I was going to retire into I'm gonna I'm leaving. Let let me let, Let me let a cat out of the bag, let

me let a secret out. It's not that hard to be a fiduciary if and if anything, it's easier because every time there's an issue, you just say to yourself, well, what's in the client's best interest. I'll do that. The rules on suitability are so much more complicated than just saying what's in the client's best interest. So why do these guys want to exit? They're just not used to that world, or to me, I'm I'm astonished by that comment.

I've actually seen, Uh, the only affirms higher brokers, exceptional people, smart people bringing them into the fionly fiduciary side, and they never adopt to the fiduciary mindset. They never understand what it means to really put the client's interest first. They think that best interest means as long as I recommend a decent product. I'm okay, But it is a big transition from a sales culture to fiduciary culture, and some people just simply can't make that transition. Huh. That

that that's quite astonishing to me. So I know I only have you for a certain amount of time. Let me get to some of my favorite, um my favorite questions that I asked all my guests. So we discussed your background. You worked as an attorney doing estates and and trusts early in your career. UM, and you told us how you moved into the to the financial services industry. I'm still amused by the thought of you in a blue bear costume in Disney walking around with a random

walk down Wall Street book under under your arm. What was it really like that you were you were were in the costume reading about stocks and bonds or or is that an exaggeration? No, I had it tucked away. You know, you have so much padding in those bear costumes. It's easy to carry a book. You usually going from one part of the park to or the other. When you're in a costume, you get all stage. You remove your costume where most of it And that's when I

pick up the book. And while i'm you know, rehydrating myself and catching my breath for the next thirty minutes set, that's when you you pull out the book and read it. I'm trying to visualize you in a bear costume with the head on a table, with like a cup of coffee and a cigarette reading a book. That's a great visual. Well, it was more like twelve glasses of water and the book is wrapped up in a plastic bag. Why because

you you sweat so much. You're in a giant for costume in Orlando and it's ninety degrees in July, and and you're rehydrating and you're having so much fun. I can imagine. I can imagine that. Um, so we know what you did before you worked on Wall Street. Other than Walt Disney, who are some of your early mentors? Oh my, uh, you know, I think I think we take a little bit, if we're smart, we take a little bit of all the good things from almost every

person that we have a significant relationship with. People that probably influenced me the most. I'd say one was Harold Levinski. You know, okay, who is he? So? Harold has a firm of Vinsky and Cats down in Coral Gables. I like to call him the Whites or the y Sage of the profession. He was chaired the CFB board probably fifteen years ago. Uh. He's a professor of Texas Tech and the masters program there, Masters of Financial Planning. Uh.

He's just full of insights. He's written several books. Fifteen years ago, I'm sitting at an A I c P A conference on financial planning, thinking about getting into the industry. And he said, something I'll never forget is if you're going to become a financial advisor, commit to it fully the do this part time. And and I meaning that the life insurance salesman and accounts and others who are kind of dabbling in it really shouldn't be right. And

I think that's completely true. This is a very time consuming profession to stay abreast of what's of what all the changes that happen. It's it's it's a nice challenge actually, And and this this need to make a full commitment to being an excellent financial planner. Uh, those words, those

words meant a lot. And I think some other people that probably influenced me, probably a couple of the professors that I worked with now, one is Andrew had his Young Professor really the reason I joined Western Kentucky University. H he has this way of captivating the students in his classes. I've seen him do this and also connecting with students on a one on one basis that I'm

just absorbing his lessons on that, on that. And then there's a Dr India Chaci, who you know, probably the toughest finance professor in the world, um in terms of the assignments that the case study methodology he uses, the amount of workload, and yet the students, when they have this enormous respect for him, they want to please him.

They come out of his class learning so much and and just to be around these two individuals and and the other finance faculty at Western Kentucky University, it's it's really, it's been already just one semester there has been this tremendous experience and I'm looking forward to more interesting. Um. So let's talk about investors who might have influenced you, What investors have changed your thought process either about being a fiduciary about putting money at work in the market.

Who who has influenced your thinking on the fiduciary front, without a doubt, the single most influences Professor Tomorrow Frankel, Boston University College of Law. And and she's been writing about fiduciary law. She's in her eighties now still teaching. UH. And she's just a wonderful writer and fiducier all things fiduciary. Who gave you the two thousand eleven Tomorrow Frankel Fiduciary

Standard Award was that the Committee for the Fiduciary Standard. UH. That award is now given by another organization called the Institute for the Fiduciary Standard. I involved with both of them, both grade groups UH and UH. So it was the first time they gave that award. I had done some assistance with some of their projects and relating to lobbying the SEC or working educating the SEC. I should say, so it was a nice it was a nice surprise

to get that year. UH. But you know, come back to the to some the questions you know, other influencers on the on the finance side, uh Gene Fama. Without a question, I admire David Boothford for taking this academic approach to investing and building this huge firm out of it. Dimensional Funds Advisors now a four billion dollars, right, that's a huge pile of money. And if you're an advisor and you're not working with Dimensional Funds Advisors, I'm like saying,

why aren't you? You know, I look at the universe and say, we're Dimensionals at the top. Vanguard is number two. And then there's a huge follow off after that in terms of the way that the mutual funds, for example, or other investment products are designed engineer the whole run off, right, And and there are some specific products that are pretty good.

But but in terms of the overall platform, and I know, I know it takes takes something to be able to access Dimensionals Funds, but you have to be an advisor. They make you go through a bunch of hoops to understand what dimensions mean, small cap value, etcetera. All the different factors. They really don't randomly take people and their crew.

They're the advisors who work with Dimensional They are not active traders, meaning that even in the O eight oh nine collapse, these guys are sitting tight and saying, hey, we're never gonna be able to time this, so we're just gonna ride it out. And they had almost no they may even had to have had inflows during that period, So it's not for So would you say you don't understand why my office is a dimensional shop, But I could see why some people would look at his scans

and say this isn't for me. Again, I've drank the kool aid, so I have no objectivity with this. But there are people who say, we want to pick stocks, or we want to try and time the market, or we want to have more flexibility, and if our clients want out, we're not going to tell them not to get out. I think one of the things I'm fond of saying is your clients don't know what they want, and it's your job to tell them what they need.

They think they know what they want because they read a headline so many on TV said something, but that's just a momentary lapse of reason. What they need is to someone is for someone to say you may think you want this now, but let me explain what you needed, because what just happened in China last month has nothing to do with the thirty year plan you put together about your kids going to college and your retirement and a generational length transfer. This is a temporary thing, not

part of your plan. They need someone to tell that, even though they want to hear whatever the craziness that happens to be on television that moment. You know, every investor needs to have this this plan investment policy that says, you know, we we don't know if the market is going to go up or down, but we know how we're going to react to it, and we know that we need to keep these four words in mind. And

I used to hold client conferences. I was working in a firm, and you know, you do the luncheon, and you bring in thirty clients and you have a nice luncheon or dinner, and I would have all the clients stand up and repeat after me, very loudly. These four words become some solemonic wisdom, right, buy low, sell high. That's simple, okay. And they would be beating that to me. And and of course getting them to sell usually wasn't

very difficult. Taking gains off the table. Of course, the downturn happens by low a little bit more difficult when they don't think the world is going to exist next week. To get them to buy when things are really low. If the world isn't gonna exist, so what so go buy stocks? What do you care if we're all gone in a week? What does it matter? So at the time the firm, I was with UH, and when I went to teaching, I sold my interest in the firm to my partners. UH. We had a hundred and thirty clients,

a hundred and twenty seven of them. Did what we asked was the market was going down, we bought and went down further. We bought on March nine, just by fortunate luck, we bought again, you know, and and the clients reaped the benefits of that. UH and a lot of a lot of the financial behavior side of this, And it doesn't matter if you're a roaber advisor or if you're hands on have a deep relationship with a

few clients. Is preparing clients for what's going to happen and in advance and getting them to remember that they committed to following this plan regardless of what happens. Look you said, markets go up, markets go down, well pretty much all the time. That's what's gonna happen. Markets will go up and down. Are you emotionally ready to ride that? Right? You know, we had clients who who were going to

cancel their vacation trips. Uh, you know, seven years old, gonna go on a cruise down the river in Europe, and in our response to them is absolutely not okay, No, we We've looked at your portfolio. You can still do this, your retirement still secure. Go do this, Go enjoy yourself. The market will be here when you get back. And and that's delivering value to a client is when you can do that. You know. One of the questions I did not ask you earlier, but let's let's bring it

up here. You mentioned a hundred and seven out of a hundred and how often should an advisor fire a client? Meaning how often is there a bad fit? Where I'm gonna I'm gonna phrase it differently, how often is it in everybody's interest to say, hey, listen, we do acts you want, why let's part as friends and go our separate ways. I think screening clients to make sure that they fit with you, fit with your firends philosophy, but

also fit with your personality. There there are clients that came to our firm that I wasn't a very good fit with personality wise, but one of my partners was a good fit with them. And I think that the idea of having a firm that you have shared client relationships with is a tremendous opportunity to secure more clients. But there they are probably the people out there who who will never embrace the investment philosophy that you might be using or the manner in which you serve clients.

And you have just got to be honest and say we think you might be served at elsewhere. And if you take on those clients, if you if you're screening process, you know, I like to say, clients, will any of you us? We interview them absolutely. And if if you take on those clients and it turns out to be a mistake, then fix that mistake right away. It's people don't realize to say, okay, we're not gonna be your adviser anymore. That's time consuming, it's a headache, it's a disruptive.

You have to file a certain thing every time a client leaves you have to have a note in a file. Here's why this relationship terminated, here's where the money met went. So there's no money laundering issues, there's a whole bunch of regulations. You're you're much better off screening that issue out beforehands, rather than saying, well, we'll just bring them in and they'll fire us in two or three quarters. But in the meanwhile, we've collected the fees. It's not

worth it to do that. It takes time to too. It takes a huge amount of paperwork, time and also educating the client and training the client in that first year. And you simply don't make that investment with a client unless you're really really confident that that's going to be good fit for you. I mentioned the email that wasn't made up, that was a real email. Hey, I have X number of millions of dollars. I want to spread this money around five people, and whoever does the best

gets all the money. And I wrote this guy, Hey, you're clearly a bad fit for us, but I have to tell you what you're setting up is a disaster. And here's why. Think about how you've just incentivized not me, because I would never do that. How you've incentivized these five managers. First, the odds are five to one against any of them winning, So you've now created this huge incentive for them to be reckless with your money in

hopes of winning the big account. You've created a lose lose situation for these guys aren't going to get the account, so they're gonna do god knows what. And the fifth, if he wins the account, it's gonna be because he got lucky doing really risky things to show you the best performance. Why would you do this? And it was to me, it's so obvious. That's a person said, well, you don't want to compete, so obviously, and we get I get emails all the time. What's your sharp ratio?

My sharp ratio is see you later, that's my sharp ratio. You know, economic incentives matter, and they manner a huge amount in financial services. And if you're a fiduciary, you have got to set yourself up that you're not driven by these incentives to do something bad for a client. And that remans removing conflicts, because if you have a conflict of interest that is going to infect your judgment.

Maybe unconsciously, you're going to somehow over time, self justify doing something bad to a client if you have an economic incentive to do it. And and that's the purpose of the fiduciary standard is to remove those economic incentives to still be paid as an expert, as a professional.

You you deserve professional level compensation, no question about it, right, but to remove the economic incentives that really would cause you to do things that would harm the client and to put you on the same side of the table absolute client. Um, let's keep plowing through my last few questions while I while I have you, how about some books? What are your favorite books, either on investing or non

fiction or anything else that you think is worth sharing. Uh? Well, I've always been a Tom Clancy fan on the side, you know, I'm what's your favorite Clancy some of all years? Is how I found him? Uh? I would say Cardinal to Kremlin probably the first one I read, so you

know that remains one of my favorites. Uh. The Hunt for Red October was a good one, no doubt about that was great without a great On the nonfiction side, uh, the investment side of you know, I like authors like Peter Bernstein, of course, So let's back up, is that Peter Bernstein. When I was on vacation last month, I brought with me Against the Gods and sitting on my desk at home on top of Against the Gods as good as gold, amazing. Yeah, great books. You know, I

go back and reread uh those books. Uh. And Larry swad Rows stuff. He sends to come out with about a book a year or so. Swedrow is another scorched just nothing gets him. And he was on the show. He was great. You meet him. He looks like such a quiet guy and then he starts speaking and there are no lots of colladal damage, no survivors. He just mows everything down in front of him. What what book of his is on your recommended list? I guess for

for beginning investor? Uh, I like what Wall Street doesn't want you to know. I think it's like his first or second book. You know, I actually have my had my students read uh The Incredible Shrinking Alpha. Last semester. He has been on a tear about hedge funds private equity. He just recently and I'll see if I find the link did something that basically says sixty performs private equity.

Just he's just been achen but but if I had to say two books that are to be if you had only two books on your bookshelf, one of them are to be Roger Gibson's Ascid Allocation Roger Gibson's Asset Allocation, fifth Edition. Now that's a that's a pretty thick tone, isn't it pretty thick book? You know. It's that's on my that's right over my desk in the office, right, it's it's like Rick Ferry on stboards. Okay, it's uh so you take Rick Ferry's Acid Allocation Book, which is

another very accessible and very readable. I use that on undergraduate you know, and Roger Gibson's more of a graduate level professional type view of that. But the other one is a book that's almost a hundred years old. Now it's you can find it on the web for free. It's a George Clayian's The Richest Man in Babylon. Oh sure, I read that a little time ago. You know you ought to reread it. Really, you ought to reread it about once every five years. I do that with Mark

Market Wizards by Jack Schweger. I reread that every five or seven years. So the Richest Man in Babylon is a parable, Yes, a series of parables supposedly true from from the days of Mesopotamian what have you, and tell us that there are by the way, there are a few books like that, um, that are essentially parables. But tell us about the richest man in Babylon. Seven major themes, and I'll just go into two of them. One is investing yourself, but the but the other one is probably

the best illustration of how to do this. The best explanation is live below your means that the parables that are surround that, and they're actually two or three on that theme, are are fantastic. And I will buy that book and give it to clients or the sons and daughters are clients, especially those who are getting ready to graduate from college, and and say you really need to read this, and hopefully they do and and some do and they gain knowledge from it. It's also pretty interesting

wedding gift, by the way, that's fascinating. UM. So we talked about all the things that changed in the industry, UM since since you joined the join the industry. Anything else you want to reference as to what might be the next major shifts or recent changes of note, or have we beaten that horse. Well, you know, I think going forward, it's fairly predictable that as the fiduciary standard comes into play, high cost variable nuities are going into sphere.

Equity index annuities, I love the concept of them as a fixed income alternative. I think they're marketing incorrectly. The cost structure is not transparent at all. The the control of the insurance company has over it is not correct. Isn't that true with all insurance products? The cost structure is not transparent, uh, to a large degree. You know, variable life variable nuities, the call structure is more transparent than whole life universal life equity index and duties. There's

really no transparency. It's a great concept, that the implementation of it has been poor, and it makes it tough, really tough for a fiduciary to recommend an equity index and nuity Right now, I haven't found one that that I'm uncomfortable recommending. Immediate and nuties they are to be used a lot more often. What sort of a nuties? Immediate fixed income annuities? Okay, so retirees should probably take a portion of their wealth and annuities. It maybe not

all in one chunk. Maybe over times early retirees with an inflation writer. Uh So, this way they know they have a guaranteed income no matter what happens in the market, and the real risk at that point becomes inflation, not running out of money exactly. We move that, you know. And I'm a little suspect about the whole concept of longevity and nuities. I think that it's a great concept.

You can pick up them mortality credits and it does assuage the fear of that, But I think you're giving up a lot and and a lot more research I think is needed in that area as to whether or not that is really fits very well with the rest of her portfolio. Well, what we It's funny there was an article in Barrens about this. In our fixed income portfolio, we're in the midst of trend, so every year we do a big look see and say what do we wanna keep, what what's better, what's and usually we don't

do a whole lot of anything. But over the past year, the bond dated ETFs have come out and there was just an article in Barrens. And we started doing looking at this a while ago, where you could create a laddered fixed income portfolio using low qust ETFs. So if someone's concerned about what one of them if rates rise, well, look when the O sixteen ends, you take that cash and you buy the O nineteen, and when the O seventeen. And that's the sort of technology, that's a sort of

product which is a dirty word on Wall Street. You could not do that two years ago. It didn't really exist. Yeah, you could have, you know, target date funds in a four oh one K, but you couldn't say I want to take X amount of my fixed income portfolio and have it constantly be rolling. It's really a fascinating innovation

that I think a lot of people don't understand. If you can remove interstate risk or at least manage it substantially in this type of environment, with this laddered approach that you're talking about, that is probably the best fixed income strategy for the next decade. It's quite fascinating. If it was. If you go a little longer, it would be great. But I think right now you could go

out three or four years using ice shares. I don't know if you go out much further um, But it really another one of those issues that the technology just didn't the products didn't exist a few years ago. Um. Next question, So we talked about major shifts. Let's let's talk about my favorite two questions, my last two questions. So you work with a lot of students, You work with a lot of millennials, and and I don't know what we're calling the generation after millennials, if if they've

renamed them yet. What advice would you give to somebody graduating school this year who was interested in looking into a career in finance. Find a firm that's going to invest in you. Uh, you don't say I'm gonna go hit the ground running and be able to do everything that I have full blown financial advisor needs. Really think about the first year, the first perhaps the second year as a residency process. Work extremely hard, get your certified

financial planner certification done in that first year. Uh, probably by the end of the first year, in addition to whatever licenses that you need. Uh. Work hard. To think about it as a medical residency, working not perhaps that hard, but but hard, and learn all that you can, absorb

whatever you can. Once you have that couple of years of experience in this industry and you've invested in yourself, that way, you can write your own ticket and and hopefully you'll stay with the firm that you join and they will have a career path for you, and you see your future with that firm. You enjoy that firm.

But if if that doesn't work out, and you have invested in yourself and the firm is invested in you, then you will You are a very marketable person right now in terms of the demand for experience financial planets right now. And my final question, what is it that you know about investing today that you wish you knew twenty years ago when you when you began. One thing uncertainty, Uh, it is prevalent. It is with us, it will always

be with us. I'm amazed at how many financial planning programs are set up to say, or we design the portfolio so that you can retire by the time you're fifty eight. Right, Well, guess what you know. There's a lot of uncertainty about the future returns. I think innovation is going to be great in the United States as long as we fuel it with a lot of capital.

We apply for diucry standard. We removed this this rent extraction that Wall Street does over time, that's going to lead to greater capital accumulation in the United States and help propel our economy forward. Uh So, I'm very optimistic about the U. S economy compared to I guess most of my fellow colleagues over the next decade, over the next two three decades. But this whole concept that there's a lot of uncertainty out there still, and we shouldn't

be telling clients you're gonna retire. We ought to be telling clients, I can help you retire early. I don't know when that will be, but I know that if you followed my advice over the long term, if you stick with this discipline process that we're going to implement, did I know that you will be able to achieve whatever your lifetime goals are, faster and better. And and that's the type of promise that we ought to be telling our clients, not giving them such a hard line.

This is when you're gonna accomplish something. Ron. This has been great. Thank you so much for being so generous with your time. If people want to find more of your writings, where would they go? Uh my blog scholar FP dot blog spot dot com and on Twitter. You are one four zero LTD. I don't know where you came up with that limited characters. I want to thank um, my head of research, Mike bat Nick, and my producer

Charlie Volmer for help putting this together. Be sure and look Up an Inch or Down an Inch on iTunes to see the other seventy five or so podcast we've done. I'm Barry Ridhults. You've been listening to Masters in Business on Bloomberg Radio