MIKE: Brian is with us today to compare and contrast from what he does as a fiduciary in retirement planning, and the banker-broker model, and what they do. And we’re going to be very factual and get down to the nitty gritty here comparing and contrasting the two methods on how they approach retirement planning. So Brian, I’m just going to hand it over to you so we get started right away with all this great information.
BRIAN: Sounds good. Thanks, Mike. Wanted to contrast the banker/broker model which is an all-risk model in retirement to the Decker Retirement Planning distribution planning model that we have. But before I start, I want to just… an interesting fact that I read this week. In 1996, the U.S. stock market had over 8,000 listed companies. Today, because of mergers, and acquisitions, and consolidation 36 hundred companies, today encompass our U.S. stock market.
BRIAN: All right, with the banker/broker model… By the way, I was raised, trained in the banker/broker model. I lived it, I did it, and I knew it was wrong right away. So, I’m going to compare and contrast what the bankers and brokers dish out to you, in retirement and compare each step with a distribution planning model. So, first off, the banker/broker model is, they use a platform, the asset allocation pie chart. Here’s how the asset allocation pie chart works.
BRIAN: You’re given a risk questionnaire, and you’re asked questions about how much risk that you want to take. And based on how you answer the risk questionnaire, they feed it in to produced a recommended, diversified portfolio of mutual funds, managed stocks, ladder bonds, etcetera to produce a diversified portfolio. They also use… well, I’ll stop there. All that money is at risk.
BRIAN: Compare that with a distribution plan, which is a spreadsheet that shows on the spreadsheet, on the left side, all your sources of income. You’ve got your pension, your rental real estate, your social security, the income from assets. We add all of that up right to left, and we total it up into gross income, minus taxes. That gives you annual and monthly income with a, usually a three percent COLA, Cost of Living Adjustment to age 100. Mike, you know this. What is the number one fear of people over 50 years old since 2008 in our country, right now, today?
MIKE: I believe it’s running out of money, is that correct?
BRIAN: Yep, it’s running out of money before you die. Our clients don’t have that fear because they see how much they can draw, where it’s coming from, and they have priceless peace of mind knowing that they’re going to draw a certain amount of money from their assets for the rest of their life. Anyone who doesn’t do these calculations, is just guessing. They have no clue. I’ll never forget a meeting I had two years ago now, with a Boeing engineer, he was approaching 70 years old.
BRIAN: He had over 7,000,000 in assets, and he told his sweet wife she could only spend 1500 dollars a month. He was so petrified of spending through his assets that it became ridiculous. The fear of running out of money before you die is prevalent among people that are using a banker/broker risk accumulation model. It’s the pie chart. The pie chart is fine in your 20’s, 30’s, and 40’s when you have a paycheck coming in and you can take hits like 2008, where you take your 30, 40, 50 percent hit, you take four years to get back to even.
BRIAN: And you’re fine if you’re adding to your 401K. It doesn’t really hurt you. But when you’re in retirement, and you take a 30 or 40 percent hit, and you’re drawing income from that portfolio, and you’re taking four years to get back to even, let me tell you what you’re doing. You’re committing financial suicide because when you draw income from a fluctuating account, you compromise the gains as the markets go up, you accentuate the losses when the markets go down, and you also, when you’re drawing money…
BRIAN: Well, let’s actually do a mathematical approach to what the bankers and brokers use for their distribution model. So, first of all, strike one against the bankers, brokers in dealing with a retired person is that they put all your money at risk in a asset allocation, diversified, mutual fund portfolio. That’s strike one. Is it’s an accumulation plan when you should be using, if you’re 50 and older, you should be using a distribution plan.
BRIAN: At Decker Retirement Planning, all of our clients have a distribution plan where they’re drawing money from principle guaranteed accounts, not from risk, or fluctuating accounts. But strike one is that they’re using an accumulation plan. Strike two is that they’re being told to pull your money… strike two is that banks and brokers tell you that your safe money is in bond funds. Now I want to explain how ridiculous this is.
BRIAN: To say that bond funds are safe when interest rates are this low, is financial malpractice. And this is common sense. Number one, when interest rates are trading where they are now, if you were to look at a hundred-year history of the ten-year treasury yield, you would see that we’ve only gone below two percent twice. The second time was last year, the ten-year treasury yield went to one, point four percent, then went up in January to two, point six percent. Right now, it’s at two, point three percent, it’s near all-time record lows.
BRIAN: So, bankers and brokers will use what’s called the rule of 100, meaning that a 60-year-old should have 60 percent of their assets in bonds or bond funds. A 65-year-old should have 65 percent, etc. The rule of 100 when interest rates are this low, makes no common sense because now you have at 60 years old, 60 percent of your portfolio earning almost nothing. But that’s not the biggest problem. The biggest problem is strike two, that I’m talking about. It’s called interest rate risk. Interest rate risk is where you lose money as interest rates go up.
BRIAN: When interest rates go up, mathematically, not Brian’s opinion, mathematically you lose money in bond funds, period. So, for example, from 1994, the ten-year treasury went in one year from six to eight percent. The average bond fund in 1994, according to Morningstar lost 20 percent. In 1999, the ten-year treasury went from four to six percent. The average bond fund lost about 17 percent that year.
BRIAN: Ladies and gentlemen, if we go from where we are now, at two, point three percent on the ten-year treasury back to just four percent, that’s between a 15 and 20 percent loss of principle on what bankers and brokers are telling you is your safe money. Now I want to hit this even harder. Bill Gross, arguably the smartest man on the planet wen it comes to bonds, and bond funds. He used to work for Pimco, now he works for Janus. He did an interview with Barron’s last year, and he said several things in that interview.
BRIAN: First of all, he said that bond funds are not safe when interest rates are this low, number one. Number two, that you’re not being paid for the risk that you’re taking when interest rates are this low. Number three, what the federal reserve bank is doing is unsustainable. And number four, interest rates will eventually have to go back up, and when they do you people that have listened to your banker or broker, will get hammered when interest rates go back up because you will lose money when interest rates go up on your bond funds. That is a fact.
BRIAN: Two plus two is four, these are absolute mathematical facts. So, we believe it’s financial malpractice for bankers and brokers to put retirees, all of your money at risk, strike one, in an accumulation plan. And strike two, to tell you that your safe money is in bonds or bond funds. What is strike three? Strike three is the distribution strategy that banks and brokers use to distribute your assets from your portfolio. It’s called the four percent rule.
BRIAN: Now, I want to hit this one hard. I want to warn you, this is a community service from Decker Retirement Planning in Kirkland and Seattle. The four percent rule goes like this, and by the way, in my opinion the four percent rule is the most destructive, toxic financial advice out there. It is responsible again, in my opinion for destroying more people’s retirement in this country than any other piece of advice out there. Here’s how it works. The four percent rule says that stocks have averaged around eight percent, eight and a half percent for the last hundred years. That’s true.
BRIAN: Bonds have averaged around four and a half percent for the last 37 years. That’s also about right. So, let’s be really conservative and just draw four percent of your assets for the rest of your life, and you should be fine. The problem with that advice is it works beautifully when the market’s in an up trend. The stock market has 18 year cycles to it. From 1946 to 1964 there was a bull market. 1964 to 1982, 18 years of flat shop. 1982 to 2000, biggest bull market we’ve ever had. From January one 2000 to present, the market’s been relatively flat.
BRIAN: So, when the markets are flat, not only doesn’t the four percent rule work, it actually destroys your retirement. This is a mathematical fact. So, let me prove this to you. Let’s say good news all of you Decker Retirement Planning listeners get to retire. You’re given 4,000,000 dollars of Monopoly money January one of 2000. Let me walk you through how you lose your money. The good news is you’re retired at the beginning of a flat market cycle with 4,000,000 dollars.
BRIAN: The bad news is, 2001 and 2002 is a 50 percent drop in the stock market. But you lose more than that because you’re drawing four percent a year. You start 2003 down 62 percent. The good news is, the market’s double from oh three to oh seven. The bad news is, you don’t get all that because you’re drawing four percent a year. Four percent per year in oh three, oh four, oh five, oh six, and oh seven. Then, the markets tank over 50 percent from October of oh seven to march of oh nine, and you take four percent on top of that, and you are done.
BRIAN: You’re done. And in fact, proof that this happened, do you remember in 2009 all of the grey-haired people that had to come back to work. They had to sell their home, move in with the kids. They had to go back to work because their retirement plan was destroyed by the four percent rule. We saw them. They were in banks, they were in fast food, they were at Walmart. They had to go back to work because the four percent rule destroyed their retirement. William Bengen, who created the four percent rule went public in 2009 with comments that are on our website, Decker Retirement Planning dot com.
BRIAN: He said that the four percent rule is dangerous, he doesn’t use it, and when interest rates are this low, it doesn’t work. And yet, and here’s what bothers me the most, that was in 2009. Bankers and brokers still use it today. We want to warn you that the banker and broker model will hurt you. It is designed for people in their 20’s, 30’s, and 40’s that want a diversified portfolio, buy and hold, all your money at risk. If you are retired, and you’re using a banker/broker model, you’re putting yourself in unnecessary risk.
BRIAN: So, Mike, this is a good point to provide an offer. We will put side by side, a banker/broker asset allocation pie chart with a distribution plan and show you the difference. We’ll put in the work, no charge, and we’ll show you how a banker/broker model side by side with a distribution plan where you can see where your income is coming from in a distribution plan, how much minus the taxes. It gives annual and monthly income with a three percent COLA for the rest of your life.
BRIAN: It is night and day, black and white. It is common sense to use a distribution plan, and not an asset allocation pie chart.
BRIAN: All right. Continuing on, want to talk more about the banker/broker model in contrast to what we do with distribution planning at Decker Retirement Planning in Seattle and Kirkland. So, when it comes to the asset allocation pie chart where all your money is at risk using the rule of 100 to decide how much money they’re going to have you put in bond funds. And then telling you that those bond funds are safe, and then using a four percent rule. That should be strike one, strike two, strike three.
BRIAN: But let’s go further. I want to tear into this banker/broker strategy a little more. Why do bankers and brokers keep all your money at risk? Why would they do that? Its because that’s how they get paid. That’s how they get paid. I know this because I lived it. When I started in 1986, over 30 years ago I did this. I had clients that i used what i was trained to do, I had a diversified portfolio stocks and bonds.
BRIAN: And I remember when, in 1987 Black Monday, October 19th, a 30 percent drop in the market that day. That was Black Monday. The next day, Tuesday, my largest client came into the office, no appointment, blazed past the reception desk, opened my door and leaned over my desk and said, Brian you’ve lost me and my family over 250,000 dollars we can’t afford to lose. What’s your plan? I gave him the song and dance that he should hold on, those are good companies, they’ll all come back. But I knew in my heart, and by the way I was lucky that that was a one day bear market, that things did come back.
BRIAN: But I knew that the plan that I was trained in had no downside protection. None, zero, nada. All of our client money was at risk, and I swore to myself that that meeting would never happen again. I didn’t want to see my clients have no downside protection. So, in contrast to bond funds, let me tell you what we do for our quote, unquote safe money. We have laddered portfolios of principle guaranteed accounts.
BRIAN: So, in the first five years, client money is drawn from, we call it bucket one. Bucket one, in fact I’m going to give you some of the numbers of an actual client that we’ve got. So, he’s got one point four million, and bucket one is set aside in fact it’s a Goldman Sachs principle guaranteed, FDIC insured, money market account and earns one point oh five percent. And it’s job is to provide income for the first five years.
BRIAN: And so, in the first five years, on this one point four million dollar account, bucket one is to provide monthly income. And it is spent to zero. After five years, that money, this client has taken 250,000. You would think that in five years of drawing 250,000 from one point four million, that the total account value would go down. It doesn’t. The one point four million actually goes up in value because buckets two, three, and four the risk bucket are returning higher.
BRIAN: So, in the years that the client drew income from the lowest earning account, it gave five years for the three higher earning accounts to grow, and compound more than offsetting the 255,000 that they drew from their income in the first five years. So, after five years bucket one is gone. Bucket two, principle guarantee kicks in for years six through 10 provides monthly income and then at the end of ten years, bucket two is gone. Now at the end of bucket two, ten years, our client has drawn over, well close to 550,000 dollars.
BRIAN: Now you would think that in ten years as the client drew 550,000 that the one point four million would go down. It didn’t. Because in the first ten years that our clients are drawing that 550,000 from principle guaranteed accounts, it gave ten years for the two higher earning accounts to grow and compound more than offsetting the 550 that they drew as income for the first ten years. Now I know you get this so here’s 11 through 20, the third bucket, also principle guaranteed draws income, monthly income for our clients for years 11 through 20.
BRIAN: Now in year 15 we create a new bucket, bucket four. It grows for five years and pays out for the remainder of their life. But we just couldn’t fit it all on one spreadsheet. But the most important point in the planning we do is that buckets one, two, and three are responsible for the first 20 years of our clients income, and they’re drawn from principle guaranteed accounts, and they’re laddered in their maturities. So that, and this is the most important thing I can say on the radio show today.
BRIAN: So that when the stock markets crash every seven or eight years, like they do, when interest rates go up or down, when the economy goes up or down, but most importantly when the stock markets crash every seven or eight years like they’ve been doing for decades, our clients are unaffected. In 2008, the clients that did the planning were unaffected. They didn’t have t go back to work, move in with the kids. They didn’t have to sell their home. They didn’t even have to change their travel plans because they had principle guaranteed accounts that were laddered maturities so that they could be completely removed from stock market risk when it comes to their income.
BRIAN: Now, I want to make it clear, in the distribution planning strategy, does our clients have stock market risk? Yes. I will get to that in a second. So, what do we use for our principle guaranteed accounts in buckets two and three? ‘Cause these accounts were very conservative. We’ll say that they’ll average three and four percent. By the way, in a low interest rate environment if you can get three or four percent, that’s pretty good. So, our clients are given the choice of CDs, treasuries, corporates, agencies, municiples, or fixed annuities.
BRIAN: We used to use these before 2008, when interest rates were higher. All of these, when interest rates are at or near all-time record lows, these fixed rate investments are not the best returning investments right now. They’re not. They’re options. Our clients can use them if they want to. But our clients are very smart, and they’re mathematical in their approach, and they use what are called equity linked CDs, or equity indexed accounts for buckets two and three. How do these work? Equity indexed accounts or equity linked CDs are offered by banks and insurance companies, they’re principle guaranteed.
BRIAN: And they way they work is when the markets trend higher, you capture around 60 percent of the S&P gain for the year. And when the markets trend lower, you lose nothing, zero, nothing. You don’t make anything, but you don’t lose anything. So these have been around for around 25 years, they average around seven percent. In the last sixteen years, they’ve averaged six and a half percent. We use them in buckets two and three. Where in the world, last year for example in calendar year 16, our best equity indexed account earned nine point three percent. How in the world can you get a better return than that on a principle guaranteed account?
BRIAN: Now we’re fiduciaries. Let’s talk another reason why haven’t you heard about these. Because they don’t offer any security commissions and there’s very little incentive for a banker or broker to tell you about these. We use them for our clients because right now, they’re offering the highest return for principle guaranteed accounts. Mathematically, that’s not opinions, it’s just math. So, when I said that we’re fiduciaries, we are required by state law to put our clients best interest before our company’s best interest.
BRIAN: Bankers and brokers are not fiduciaries. We are fiduciaries. And by the way, there’s an easy three-step way that you can check to see if your banker or your broker is a fiduciary. This is very easy. Number one, ask them if they’re Series 65 licensed. If they are, that’s good check that off, that’s one hint. If they’re not, if they’re Series 7 licensed, they cannot be a fiduciary because they take security commissions. We are fee only. So, that’s step one.
BRIAN: Step two, is are they independent? Decker Retirement Planning in Kirkland and Seattle are an independent company. We are free to offer any financial instruments that benefit our clients. We are arms length, we are not being told from above what we can and cannot sell or use for our clients financial planning. That’s not true of bankers and brokers. Bankers and brokers are told what they can and cannot use. Step three. Step three is where we as an organization are an IRA registered investment advisory firm.
BRIAN: That’s our corporate structure. Those three things have to be in place for your banker, or broker, or financial advisor to be a fiduciary. Bankers and brokers are not fiduciaries. There not independent, they’re Series 7 licensed. And speaking of Series 7 license, let me give you some examples of how bankers and brokers take advantage of you. And by the way, if you’re driving pull over and jot this note. Number one, they will sell you, key word sell, ’cause they’re salesmen. They will sell you high commission products that benefit them, not you.
BRIAN: For example, if you have non-traded REITs in your portfolio, your banker or broker got 12 to 14 percent commissions on those. Huge commissions, which generated by the way The DOL rule. The Department of Labor from Elizabeth Warren that is coming down right now requiring more disclosure and transparency so that bankers and brokers can’t continue to take advantage of you like this. If you have non-traded REITs, I hope you come in. We can help you get back on track, but those are really rough.
BRIAN: They’re not liquid, real estate market cycle. If you go through a 2008, and real estate cycles down, you cannot get out. There’s nothing you can do. That’s not in your best interest but it definitely is in the interest of your banker or broker that just got a huge 12 to 14 percent commission. The other one that we see all the time are variable annuities. Variable annuities are toxic. We’ve never used them, we warn people about them, and we hope that you don’t fall into the trap of ever buying a variable annuity.
BRIAN: Let me tell you more specifically how these work. A variable annuity is where the banker or broker gets about eight percent commission right up front, he gets paid every year you own it. The insurance companies get paid every year you own it, and the mutual fund companies get paid every year you own it. Three layers of fees that usually add up to five to seven percent before you make a dime. We don’t like them, we don’t use them. And we have a saying in the business that variable annuities aren’t bought, they’re sold. Meaning that if you could’ve known with transparency and full disclosure of all the fees that were involved, you never would’ve bought one.
BRIAN: Now if you have one, there are some options that we can talk to you about. If you don’t have one, we hope you stay the heck away from them. This is a community service in warning you that variable annuities aren’t good for you, they’re good for the banker or the broker with huge commissions and paydays. While I’m on it, when it comes to annuities we want to warn you to stay the heck away from variable annuities, income annuities, and life annuities, bankers and brokers sell these all the time. When it comes to Decker Retirement Planning, we are fiduciaries, we will not sell these.
BRIAN: Let me give you an example of how ridiculous an income rider, or a life annuity is. Let’s say that you’re 65 years old, you’re retired from Boeing, and Boeing’s going to give you an option. You can either take 250,000 from life or 200,000 lump sum. What are you going to do? What would you do, Mike? What would you take? 250,000 or 200,000 lump sum?
MIKE: I mean, so I work in the industry so I know the right answer.
BRIAN: Aw, play along.
MIKE: But let me say genuinely before I worked in finance. So, this is just my, I guess adolescent mind. I just, I would think, hey you know, my 401K, my HR, they’re looking out for me and the company’s good, they’re going to stay in business for a while, for as long as I’m alive at least and so I have that security. I think a lot of people feel more about security, and don’t think about the other aspects. And so, before I entered the financial world, I honestly would have said just get the pension and just forget about it. It’s a continuation of an income stream and that works for me. That’s a genuine answer before I had crunched the numbers, and got into the financial industry.
BRIAN: Okay so let me ask you the question. You’re 65 years old, you’ve got a choice to make between 200,000 lump sum you can have today. Or you can take 250,000 for the rest of your life. Most people, most really smart people, they’re going to take the higher number, the 250,000. And then an actuary is going to say, well 250,000 I think Brian’s going to live another 20 years, 250,000 divided by 20 is 12,500.
BRIAN: Brian, you get 12,500 per year for the rest of your life. And by the way, if we take 12,500 into 250,000 Brian that’s a five percent return, you can’t beat that. And now, I want to unwind what just happened. What just happened is that now Brian as our 65-year-old Boeing retiree is paying an insurance company to get my own money back and the insurance company hoes I die soon so they keep what they don’t pay me. We don’t like those, we don’t use those. They’re called life annuities.
BRIAN: We don’t like them, we warn people to stay away from them. Let me also tell you, and pull the curtain back on the banker and broker income riders. True story. Doctor, very smart person, came to us last summer. He was told that he had a guaranteed seven percent income rider on his variable annuity, and I said, oh? Let’s get them, on the phone and get all the details. So, let’s use round numbers. he put in much more than this, but let’s say that he put 100,000 in to this, and it’s guaranteed to grow at seven percent.
BRIAN: So, his plan was at 70 years old that he was going to let it grow for five more years. That would have been ten years. And then, he was going to take an income stream for the rest of his life. So, at 70 years old, at 75 years old, sorry he was, let’s say that he was expected to live, I don’t know, 75 years old let’s say another 20 years. So, we got the insurance company on the phone and they said that oh yeah, it’s guaranteed seven percent, and it grows. And by the way it can pay out for the rest of his life with a cap of 100,000 dollars paid out to the client.
BRIAN: There was dead silence, and I said, do you mean to tell me that he put in 100,000 and the most he can pull out is 100,000? The agent said yep, that’s the cap. I said what good is this investment if he can’t make any money? The client was furious, absolutely furious. No one ever told him that there was a cap on how much he could take. We do this for our clients all the time, we unravel the bad news, we pull back the curtain on these horrible investments and sadly we have to clean up the mess constantly.
BRIAN: So, we are here on the radio warning you, ladies and gentlemen, Decker Talk Radio warning you that when it comes to the bankers and brokers who are salespeople, that you stay the heck away. They’re fine with they’re accumulation plan in your 20’s, 30’s, and 40’s. but when you’re in retirement, why in the world would you use an accumulation plan that keeps all your money at risk, strike one. That has a buy and hold strategy to ride the markets up and down, and then tells you that your safe money is in bond funds, strike two.
BRIAN: And then tells you to use the four percent rule, which is a discredited strategy by it’s creator in 2009 as a way to draw money from your assets for the rest of your life, which is strike three. By the way, before we leave the subject of the choice of lump sum, and lifetime income, let me tell you that we as a practice at Decker Retirement Planning in Kirkland and Seattle, we have a mathematical approach when it comes to the planning that we do. There are three mathematical reasons why you should take a lump sum over a lifetime income option.
BRIAN: Three mathematical reasons. One is rate of return. If you have 200,000 invested today at two percent for life, that’s going to be forevermore than, the lines never cross, than someone who take s a lifetime income because it’s going to take typically 15, 1 years for you to get… a 12,500 in the example we gave, it’s going to take 16 years to get 200,000 back. So, if I take a 200,000 lump sum and Mike, you were to take 12,500 for life, I have a 16 year head start on you, as far as rate of return.
BRIAN: And at 2 percent, or three percent a year, the lines never cross. I’m better off with rate of return, when it comes to rate of return to take the lump sum, than to take the 12,500.
MIKE: Well, Brian, I want to just kind of interject here for a quick second and just kind of sympathize with those that don’t know this. Because sometimes in finance, you don’t know the right questions to ask, and so for Decker Talk listeners right now, I hope you’re writing notes down, and I hope you call in. We want to help empower you to know the right questions to ask so you can make the best decision for you, your family, and for your retirement plan. That’s really what I think we’re trying to accomplish here.
BRIAN: Okay. So, to continue on, there’s three reasons why we would recommend that you take a lump sum over a lifetime income. One is rate of return, i just described it. The second is called estate risk. And Mike, I’ll use you as an example. If you draw 12,500 for life, and I know you’re not married, but if you were married you would have a spouse. Let’s say that you set it up correctly and your spouse gets that income if you die.
BRIAN: The income goes to the spouse, it’s called survivability. 100 percent survivability. So, if you die all of that income goes to your spouse. But let’s say, and I take the 200,000 lump sum, and the three of us go hang gliding, tragedy strikes, all three of us die. What happened in your estate? Well, the 12,500 has stopped. You don’t get it. It’s stopped. Your kids don’t inherit it you don’t get it, those payments have stopped. The 200,000 that’s in my estate is in my estate, and it’s distributed to my surviving spouse, and my kids.
BRIAN: That is called estate risk, that is the second reason why we recommend people take a lump sum over lifetime income. The third mathematical reason is due to company risk. United Airlines and Pan Am are the poster child of company risk, where the pilots who retired years and years ago, they were planning on taking a certain amount of pension, and they found out that they couldn’t because those companies went bankrupt, and the pensions were renegotiated for 25 cents on the dollar.
BRIAN: By the way, 49 out of 50 states have pension obligations they can’t possibly pay back, and again the bankers and brokers are not paying attention to the train wrecks that are going to happen in the municipal bond industry when the states have to renegotiate all of this debt. The municipal binds will be part of that calculation, we’re not saying that all municipal bonds will go to zero, we’re not saying that.
BRIAN: But what we are saying is that anyone who holds municipal bonds, it’s just a matter of time before your lumped in with all the other reorganization, that when the states have to become accountable for the gap between the obligations that pensions have, and what the actual assets are, there has to be a renegotiation. And that day of reckoning is coming. We have stayed away from municipal bonds since February of 2008. That was the last time, that was when we sold our final municipal bond, and we have kept clients away from that since February of 2008.
BRIAN: Okay, back to the banker/broker differences. We talked about the contrast between how we use laddered maturities for our principle guaranteed accounts for income. That means that when interest rates go up or down, when the stock market goes up or down, when the economy goes up or down, our clients have peace of mind that it doesn’t matter to them. It doesn’t affect them. Their income is coming from a principle guaranteed source, whereas the banker/brokers have all your money at risk.
BRIAN: And those guys will call you after 2008 and say hey, aren’t you glad you’re with us markets are down 37 percent, you only lost 22 percent with us. It galls me, it really bothers me. All right, another thing that bankers and brokers will do is they will use, I mentioned high commission products, I talked about non-traded REITs, hope you stay away from those. Variable annuities, hope you stay away from those. Income annuities, life annuities, and income riders, hope you stay away from those, we covered all that.
BRIAN: Now let’s also cover high commission mutual funds where they can hide the fees. When it comes to mutual finds, there’s different shares there’s A shares, there’s I shares, there’s C shares, and B shares. A, B, C, I shares those are the main types of shared funds that are out there. What are A shares? A shares typically, and I shares are typically clean. Those are the good, no load fund mutual fund shares.
BRIAN: There are too many good mutual funds for you to ever… Let me categorically state this. If a banker or broker is having a buy and hold strategy on your stocks, why in the world don’t you listen to Warren Buffett and buy the indexes? I mean, we’re going to show you a better way than that but why would you pay anyone a fee for a buy and hold strategy when there’s something that Schwab, Fidelity, and Vanguard offer, it’s called robo investing.
BRIAN: Robo investing, again we would promote this for kids in their 20’s, 30’s, and 40’s. Robo investing is where you’re given a risk questionnaire, based on your risk profile you’re given a diversified recommendation of index ETFs where the cost is very low. And robo investing models will automatically rebalance you and not charge you any management fees, and your fees for the ETFs are minimized. The indexes that you hold, like the S&P 500 index, this comes out of Vanguard, 85 percent of money managers of mutual finds underperform the indexes every year.
BRIAN: Why don’t you hold the indexes? Why don’t you hold a diversified assortment of indexes? Now, there’s good, better, best. Good is to be diversified. Better is to be diversified with indexes, and not get charged any fees. Best is what we feel we do where we offer a two-sided strategy. I’m going to get into this in a minute, but if anyone over 50 years old is paying a manager a management fee for a buy and hold strategy, that is ignorance. That is flat out ignorance.
BRIAN: Why don’t you just… if you’re insisting on a buy and hold strategy, why don’t you hold the indexes that these active managers are trying to out perform. It doesn’t make any sense to pay a management fee for a buy and hold strategy. By the way, we are not proponents of buy and hold when you’re over 55 years old. Because now you’ve accumulated a lot of wealth that’s supposed to be there in retirement, and if you buy and hold then your taking these big hits in the stock market every seven or eight years.
BRIAN: Decker Safer Retirement Radio listeners, did you know that every seven or eight years, the markets have been creamed. So, in 2008 from October of oh seven to March of oh nine, it was a 55 percent drop. Seven year before that was 2001, twin towers go down, middle of a three year, 50 percent drop in the market. Seven years before that, 1994 Iraq invades Kuwait markets struggle, interest rates go up, economy is in recession. Seven years before that, 1987 Black Monday, October 19th, 30 percent drop in a day.
BRIAN: Seven years before that was 1980. 80 to 82 was a two year recession, two year bear market over 40 percent drop. Seven years before that was 73, 74 was a 40 percent drop in the market. Seven years before that was 66, 67 bear market two years 44 percent. And it keeps going. Ladies and gentlemen, we are no in year nine of a seven eight year market cycle. The longest expansion in the stock market we’ve ever had without a 20 percent correction is ten years, and that was in the 90’s, and we are now, ladies and gentlemen in year nine. This market expansion is getting long in the tooth, and people think… Warren Buffett has a couple of great sayings.
BRIAN: People think, hey I got this, I got this. They’re doing relly well in the last few years in the market because their investing strategy is working. Warren Buffett would say quote, don’t confuse brilliance with an up market. The second thing he says, Warren Buffett says it’s when the tide goes out that you can see who’s swimming naked. Meaning once the markets drop, all your great strategies get exposed for what they are, which is nothing. So, we do have our clients have some stock market risk, but far less.
BRIAN: Oh, by the way I want to clean up the mutual funds. A shares, B shares, C shares, and I shares. We are proponents as fiduciaries of A shares and I shares because those are good no load, low fee mutual funds. Why anyone in the world would pay a load for a mutual fund these days is beyond me. I would say that’s blatant ignorance. That’s just how I feel. And then, when it comes to bankers and brokers who will tell you that there’s no load on these funds, no front or back end fund.
BRIAN: But there’s… they have what are called C shares. C as in Charlie. C share mutual funds, there’s no load in the front, no load in the back, but the banker and broker does not disclose to you, which should be illegal. Hopefully it will be illegal soon. Is that they get one percent every year, tacked on to your other expenses. These C shares are so toxic, that Schwab, TD Ameritrade, Fidelity, and Vanguard will not allow transfer of C shares into their custodian platforms because it’s like leprosy.
BRIAN: They just don’t want to deal with them. They don’t want to have them in their… they’r just horrible. Stay away from C share funds, and know that your broker, if her hasn’t told you about the extra fees on those funds, that they’re not being honest with you. Which if fine, because they’re salesmen, and they’re not held to a fiduciary relationship. It’s what you should expect from a banker or broker. Then there’s back end fees, 12b-1 fees. On the B shares that’s the biggest hit you can take because if stick markets do go up like we hope, then instead of paying a front-end fee which is bad, you pay a back-end fee which is even worse.
BRIAN: Because now the 100,000 that you put in that fund has grown to 200,000 and you pay an exit fee on a larger amount and the banker or broker is maximizing their fees at your expense. All right. Gosh, Mike we only have five minutes to talk about the two-sided strategy, but I’ll try to wind this up. It makes no mathematical sense, and you’ve heard me repeat this several times, for you to have all your money at risk in an accumulation pie chart, buy and hold pie chart.
BRIAN: The stock market is a two-sided strategy. It goes up, and it goes down. It’s a two-sided market. Why in the world would you take a one-sided strategy, buy and hold, in a two-sided market. That doesn’t make any sense. You know it, you don’t have to have a finance degree or have years or decades of experience with Wall Street. It makes common sense not to have a one-sided strategy ion a two-sided market. We use a two-sided strategy in a two-sided market.
BRIAN: What we mean by that is that when the markets are trending higher, the models that we use are designed to make money in track with the S&P as the markets go up. When the markets drop, like they did in 2008, the models that we use are two-sided. They’re computer algorithms that are automatically switching to defense, so that they either go to cash, or they go short, or they set to rotate into other strategies, I mean other sectors that are going up.
BRIAN: For example, in 2000 oh one and oh two, when the larkers lost 50 percent, not everything went down. There were many sectors that kept going up. For example, real estate, oil, precious metals, pharmaceuticals, drugs, healthcare, biotech, hundreds of stocks kept going up when the markets were getting crushed, allowing sector rotating mutual funds like we have to be able to make money, not lose money. And then from oh three to oh seven when the markets doubled, the models that we use also doubled.
BRIAN: And in 2008, when the markets went down 37 percent, the models we use collectively were able to make money, and then when the markets went up from oh nine to present, up 150 percent, the models that we use did more than what the S&P did. So, if you were to put 100,000 in the S&P January 1 of 2000, and then with dividends reinvested, it’s worth a little over 220,000 today. If you put 100,000 in our models that we’re using 100,000 grows to over 900,000 net of fees.
BRIAN: Average annual return is 16 and a half percent net of fees. Why in the world aren’t you using the best managers and models? We are.
MIKE: So, that’s all the time we have this week, take care. For those calling in, we look forward to seeing you soon, and for the rest of the listeners, we’ll talk to you next week. Take care.
