Today we are going over the conflict of interest that bankers, brokers, insurance agents, and CPA’s might have with your investments. We are also going over why annuities could be a dangerous investment for your retirement.
MIKE: Good morning and thank you for listening to Decker Talk Radio’s Protect Your Retirement, a radio program brought to you by Decker Retirement Planning. Today, we’re pulling back the curtain and exposing bankers, brokers, insurance agents, and CPA’s and the conflicts of interest they may have with your investments. The comments on Decker Talk Radio are of the opinion of Brian Decker and Mike Decker.
MIKE: Good morning everyone, this is Mike Decker and Brian Decker with Decker Talk Radio’s Protect Your Retirement. We’re excited about today’s show and to be clear, we’re gonna be pretty transparent with what we’re talking about today, talking about bankers, brokers, insurance guys, and CPA’s. Now, with us is Brian Decker from Decker Retirement Planning. He is a licensed fiduciary, which, I think is the foundation of this conversation. A fiduciary is someone who’s legally bound to do what’s in the best interest of the client. Now, Brian, you can offer any kind of advice, as long as it’s good for the client, right? You can offer all the investment types, a number of things, correct?
BRIAN: Right. So, at Decker Retirement Planning in Carolina Pointe in Kirkland, we are required by law to put our clients’ best interest before our company’s best interest. But, I wanna talk about this whole segment. I wanna do one quick catch-up, Mike, on something that we didn’t have time to cover last week, which is why we hate annuities.
MIKE: Oh, that’s right.
BRIAN: Okay?
MIKE: Let’s wrap this up.
BRIAN: We’re gonna go into why we hate annuities and then there’s gonna be a small segment that we’re gonna talk about, which is a tragedy. You work 30, 40 years of your life, you save, you do everything right, and then in your retirement, right at the beginning of your retirement, you have a massive stroke or a heart attack.
BRIAN: Believe it or not, we see it, and with all our clients, we want you to have a great retirement and part of that is knowing how you can improve your health so that you can feel great and have a great retirement. Mike, I’m only gonna spend a few minutes on this.
MIKE: That’s fine.
BRIAN: Even though it’s a passion, I’m only gonna spend a couple of minutes. And then, we’re gonna spend the rest of the program hammering bankers and brokers. You, Decker Talk Radio listeners, if you have an advisor that works at a bank, if you have an advisor that’s working in a brokerage firm, I hope you listen to the hour that we have, uninterrupted commercial-free content, where we are going to lay heavy into their practices, their advice, their fees.
BRIAN: We’re gonna tear the curtain back. Okay, let’s start with why we annuities. Variable annuities, let’s start with those, are where the broker makes 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 a year before you make a dime. I looked up one not-to-be-named annuity and I looked at their performance in the trailing 12 months of their money market fund.
BRIAN: It was a minus-seven percent. Do you know why it was minus-seven? Because the fees. Seven percent came out. If you put your money in the money market, you lost seven percent because of the fees. So, when the markets go up and you own a variable annuity, you lag performance on the way up because of all the fees, and when the markets go down, there’s no down-side protection, so you take the full hit of the market, plus the fees. Why would anyone buy them? We have a saying in the business that variable annuities aren’t bought, they’re sold.
BRIAN: Here’s what we mean. That means, that if you knew, you the consumer, knew what we just talked about, you would never own one. But, here’s how they’re deceptively sold by bankers and brokers. By the way, a real fiduciary cannot sell one of these things, because it’s not in anyone’s best interest.
MIKE: Can in intercept there and say there are people claiming to be fiduciaries…
BRIAN: We’re gonna get to that.
MIKE: Okay. That’s a spoiler.
BRIAN: Yeah, this is a good point. We’ll get to that in a second. So, why would anyone buy a variable annuity? It’s because the sales tactic, the deceptive sales tactic is, hey, Mr. and Mrs. Brown, here’s a way for you to invest in the stock market and have a guaranteed base, where you can be guaranteed against loss of principal. Well, true and not true.
BRIAN: The guarantee is that when you die… Mike, if you bought one, when you died, you would get the high water mark, which means, the highest value during your time is restored to you, and if you take withdrawals out of it, then you’re allowed the high water mark, minus any withdrawals. So, I’m gonna switch this around and talk from the perspective of the banker, the broker, and the mutual fund companies, and the insurance companies.
BRIAN: They get your money, they get to charge you incredible fees for as long as you’ll allow it, and then when you die, they’ll give you the high water mark back on your investments. We don’t like it, we don’t use them. We have passionately warned you, Decker Talk Radio listeners, about this for many, many years. We’ve written articles about this. We have seminars. We have passionately tried to perform a community service to make sure that no person puts a variable annuity in their portfolio. So, that’s variable annuities.
BRIAN: Do you have anything you want to add?
MIKE: No, I think you said it in a very clear way.
BRIAN: Okay. The second group of annuities that we don’t like that we’re passionately against are income annuities, life annuities, or income riders. Income annuities, life annuities, or income riders. I’m gonna tell you a quick story to make a point, an illustration. Let’s say that you’re 65-years old, you worked for Boeing for 40 years, and you are offered the choice of taking 250,000 for life or you can draw 200,000 lump sum today, they’ll write you a check.
BRIAN: What are you gonna take? Well, you’re a smart person. You’re thinking, well, I’ll take the 250, 250’s more than 200. So, then, if you draw 250, the actuaries will go back and think, well, I think this guy’s gonna last 20 years. 250 divided by 20, that’s 12,500. You get 12,500 for life, and then you also get… by gosh, that’s a five-percent return. They tell you that that’s a five-percent return. 12,500 divided by 250, and that’s a good rate right now.
BRIAN: Five percent is a good rate. Here’s what’s actually just happened. I’m gonna unravel this. This guy, who just retired, is now paying the insurance company to get his own money back at the rate of five percent a year, it’s not any rate of return at all, and the insurance company hopes he dies soon so that they don’t have to pay him back the full amount. Now, there’s ways to draw this so that you do get your full amount, but we do not like income annuities, life annuities, or income riders, because you’re paying the insurance company to get your own money back over a lifetime.
BRIAN: By the way, the lump-sum option, when you have that option to be lump sum, is usually in your best interest for three very important reasons. Using this example, 12,500 divided into what could be your lump-sum option of 200,000 dollars, that means that you have 16 years before your break-even. In other words, 12,500 times 16, finally gives you the 200,000-lump sum that you wanted.
BRIAN: So, Mike, let’s say that you got the lump sum of 200,000. I drew the 250-lifetime benefit, and so I’m paid 12,500 a year. You have a 16-year head start on me as far as rate of return. My rate of return doesn’t even start until year 17. I’m not getting any return on investment unless I live to year 17 or beyond. That’s when my rate of return starts. So, the first reason that we favor a lump-sum investment, when you have the choice over a lifetime payment, is rate of return.
BRIAN: That’s number one. Number two, the reason to favor a lump sum over a lifetime of payments is for estate reasons. Again, Mike, let’s say that you take a lifetime of payments, I take a lump sum, and we both go out and die in a hang gliding crash. The money that was paid to you stops. If you were married, Mike, those payments would go to your wife, but when you and your wife die, those payments stop, they’re no longer in your estate.
BRIAN: So, if you had a tragic car accident where something happened, those payments stop when you and your spouse die. For me, that lump sum is in my estate. If I have a tragic accident, me and my wife, a week after we take that lump sum payment, it’s in our estate and it’s distributed to our beneficiaries. So, the second reason that we would say that we would favor a lump sum over a lifetime of payments would be because of estate reasons. The third and final reason to favor a lump sum over a lifetime of payments has to do with corporate risk.
BRIAN: United Airlines and Pan Am are the poster children of corporate risk when it comes to pension payments. Those two companies had pilots that were supposed to get pensions for the rest of their lives. Those companies went into bankruptcy and the pension benefit guarantee corp. came to the rescue and proudly announced that pilots got a third, which was better than nothing they said. They got a third of what they were expecting from their pension for their retirement years.
BRIAN: So, for those three reasons, Decker Talk Radio listeners, we at Decker Retirement Planning in Carillon Point in Kirkland, take a calculator out, and when we look at your benefit choices, we advise our clients, mathematically, what’s in your best interest. Now, let me ask the question, why would anyone take a lifetime of payments? This is when a person comes into our office and says, Brian, Mike, not interested in any math or any rate of return, it’s emotional for me, I just wanna know that I don’t have to deal with it.
BRIAN: I don’t mind giving up the rate of return, I’m a widow anyhow. I don’t deal with investments, and it just doesn’t matter to me if the payments stop when I die. It’s an emotional thing for me, and I just want these lifetime payments from my company. And that’s when we say, because we’re fiduciaries, we say, fine. Okay, so we talked about why we hate variable annuities, why we call ‘em a scam, and why we hope you don’t use them. We talked about why we equally dislike and call a scam, income annuities, life annuities, or income riders.
MIKE: So, Brian, do you have anything else left to say about annuities or any of that?
BRIAN: Yeah. There’s one group that we say are okay. There’s something called fixed annuities and these are like CD’s from a bank. So, before 2008, when the rates dropped, if we could get five percent on a five-year CD from a bank, and we could get 5½ percent from a fixed annuity, which is like a CD from an insurance company, we took the higher rate, we got 5½ percent.
BRIAN: We’re okay with those, but the problem for fixed annuities and similar problems for CD’s, rates are really low right now. So, when we work with clients and we have the portion that’s in their plan that is quote-unquote safe money, we just wanna make sure that you have principal-guaranteed sources of income or else you’re drawing income from a fluctuating account, which I’m gonna elaborate on. I’ll just elaborate on this right now.
BRIAN: This is so mathematically basic. When you draw income from a fluctuating account, when you’re in retirement and use an asset-allocation pie chart, which, by the way, is an accumulation vehicle, that’s for your 20’s, 30’s, and 40’s. When you’re over 50-years old and your advisor has you using an asset allocation pie chart for diversification and all your money is at risk, that’s not in your best interest. And when you pull money out of a fluctuating account, here’s the math, you compromise the gains when the markets go up.
BRIAN: You accentuate the losses when the markets go down, and you are committing slow financial suicide. When the markets crash every seven or eight years, and you take four years to get back to even and you’re drawing income out of those accounts on top of it, when the markets go down, you’re drawing out of your portfolio 120-cent dollars, 130-cent dollars, and you’re damaging your portfolio.
BRIAN: I hope this makes sense. So, enough for annuities, I’m gonna switch to kind of a strange topic. For Decker Retirement Planning in Kirkland, we see a lot of clients coming in and they have done everything right. They have saved. They’ve been prudent and frugal in their spending. They have invested wisely, and now they have 1.5, two million dollars, they’re 65-years old. Their kids are grown and out of the house, and they’re ready for their golden years, and then the husband has a massive heart attack or a stroke and now the golden years have been compromised.
BRIAN: Believe it or not… I don’t know if you know this Mike, we talk health in here. That probably doesn’t surprise you. So, the longest-living populations have not only social support and engagement and daily exercise, but nutritionally, they all center their diets around plant foods, reserving meat mostly for special occasions. In fact, populations with perhaps the highest life expectancy in the world, the California Adventist vegetarians, don’t eat any meat.
BRIAN: But, let’s talk about this. Okay, let’s talk about this for just five minutes, Mike, and then I’ll get off. In Japan before 1970, they ate a diet that was traditional Japanese, which was rice and vegetables, okay? Before 1970, very low incidents of cancer, heart disease, and diabetes in Japan.
BRIAN: Now, after McDonald’s and Pizza Hut, and Kentucky Fried Chicken moved in, their population mirrors the statistics in the United States for cancer, heart disease, and diabetes, where diabetes is now epidemic. Here are some parallels. The greatest epidemiological study ever done in the world was the 20-year study called The China Study. One of the China premiers contracted and was diagnosed with cancer, and he loved his citizens there and he wanted to make sure that they didn’t go through what he was going through, so he hired Colin Campbell, and an American team of doctors, along with Chinese protégés, and they, for 20 years, took blood and urine samples every six months from their citizens in this province in China.
BRIAN: At the end of 20 years, what they found was profound. There were two basic diets. One was the peasant diet. All they could afford was fruits, nuts, grains, and vegetables. That’s it. In that group, there was no incidence of cancer, heart disease, or diabetes. None. Zero. Nada. There was the other diet which is called the wealthy diet. These Chinese people could afford to eat meat, dairy, fish, etcetera, and they had all the typical world statistics of cancer, heart disease, and diabetes.
BRIAN: When clients come through our system here, I throw out two books to recommend. One is Eat to Live by Joel Fuhrman, Eat to Live by Dr. Joel Fuhrman, and the other is The China Study. This is the prescription, Mike: two DVD’s, they’re on Netflix, Fat, Sick, and Nearly Dead…
MIKE: And Forks Over Knives.
BRIAN: And Forks Over Knives. Fat, Sick, and Nearly Dead, this guy had sores on his body. He was grossly overweight. He waddled around.
BRIAN: He was such a horrible specimen of a human being, at least he wasn’t enjoying his retirement, and he went on a six-month juice fast, and his body dramatically changed, and he documents what happened to him. We don’t recommend juice fasts, I’m just saying. It’s pretty harsh. So, two DVD’s, two books, and the last thing is a daily e-mail from Nutrifacts.org. Free e-mail, best research I think. I get an e-mail every day. All right, enough of that.
MIKE: We should probably say that these are our opinions, even though you’re sourcing doctors. This is financial radio, but…
BRIAN: Yeah, believe it or not, this is financial radio.
MIKE: But, this shows how much of a fiduciary we are. We’re not just trying to talk about your finances. I mean, health is going to be a concern to a lot of people and I believe most people don’t wanna spend their entire retirement in a hospital. So, if you can avoid it, that’s a good thing.
BRIAN: And all we’re saying is, cut back on the meat and the dairy, that’s all. Just cut back. You don’t have to be like me. I switched cold turkey, but…
MIKE: I call myself a part-time vegan. I eat meat very, very sparingly but when I do, it’s really good. But, that’s because I love to barbecue.
BRIAN: All right, good enough. Okay, moving on. Now, the rest of today’s segment, we’re gonna pull the curtain back on bankers and brokers.
MIKE: So, to start this, I wanted to give an analogy here and I guess we talked about health. I’ll talk a little about exercise. I’m an endurance sport kind of guy. I do triathlons. Now, I’m not the best out there, I just really enjoy it. And one of the most important parts is making sure you have the right gear. So, I’m gonna tell you a quick story about finding shoes.
MIKE: And Decker Talk Radio listeners, stick with me because this is a very important point I’m going to establish. There are a lot of companies out there that produce wonderful shoes. There’s Nike, there’s Adidas, New Balance, Brooks, the list goes on. Every shoe fits a little bit differently though. If I walk into an Adidas store, guess what shoe they’re gonna sell me? Or a Nike store, guess what shoe they’re gonna sell me? When I personally got the right shoe for me after spending miles of guessing what the right shoe was and getting pain in my knees or my hips because they just weren’t fitting right, I went to a special store and they took all sorts of photographs and video of how I would step, how I would run, different speeds.
MIKE: They put it all into a computer, created a sole, and then started the process of fitting to the right shoe. And they had all the shoes, they had every brand you could think of. And we spent a good amount of time finding the right shoe. Since I have had that shoe, I can pick up and run eight, 10 miles, no problem, no pain, and I attribute it to a fiduciary-like person. So, in this case, the person helping me with finding the right shoe was acting as a fiduciary for me. There was no commission on the side that he was incentivized to push one brand or the other. He was strictly paid to find me the right shoe for my well-being and also just to make sure my body doesn’t hurt and I can keep doing these activities that I love to do.
MIKE: The same goes with retirement. If you talk to a banker or a broker or an insurance guy, and sometimes even CPA’s try and get involved with your investment advice. Please keep in mind that the incentives that they have skew what should be clear vision. So, Brian, I wanna hand this over to you and let’s go through these, one by one of what’s typical for these different occupations.
BRIAN: Okay, Decker Talk Radio listeners, I hope that you have a pencil and paper out because I’m gonna go down a list of things that I hope that you ask your financial advisor.
BRIAN: If your advisor is working for a bank or a brokerage firm, or your financial advisor is an insurance guy, or your financial advisor is a CPA that does your taxes, I hope you get out the piece of paper and a pencil. First off, let’s talk about who really is or isn’t a fiduciary. Let’s start there. A fiduciary is someone who is required by law to put your best interests before the company’s best interests. Banks and brokers will tell you that they are a fiduciary when they are not, N-O-T, they are not.
BRIAN: There’s three requirements to be a fiduciary. One is, you have to be Series 65 licensed. Ask your financial advisor if they’re Series 65 licensed. If they say that they’re Series 7 licensed, that means that they sell for a commission, they sell securities for a commission. A fiduciary is Series 65 licensed, number one. By the way, fee-only, not commissioned-based on securities.
BRIAN: Number two, the corporate structure will be an RIA, Registered Investment Advisory Company. Bankers are not RIA’s. Brokers are not RIA’s. And some financial advisors hook up with a broker dealer. Any of those three corporate structures disqualify from being a fiduciary. Number three, they have to be independent. If they’re working for a big bank or a big brokerage firm or a big insurance company or they’re being told what they can and cannot sell.
BRIAN: They’re not independent and a fiduciary has to be independent. And so, we wanna make sure that you know that those are the three requirements for being a fiduciary, number one. All right, once you get past a fiduciary, now let’s talk about how bankers and brokers make their money. They make their money by keeping your money at risk. So, they use the asset allocation pie chart, which is not in your best interest, but it’s in their best interest for two very important reasons.
BRIAN: Number one, an asset allocation pie chart is an accumulation strategy and it’s there for your 20’s, 30’s, and 40’s, but if you use it in your 50-plus years, and you don’t switch to a distribution strategy, it hurts you in several ways. Number one, they will use the Rule of 100 to identify how much quote-unquote safe money you need. So, let’s say that you’re 65-years old. The Rule of 100 says that you should have 65 percent of your money in bonds or bond funds.
BRIAN: Well, today in the low interest rate environment we’re in, you should have 65 percent of your money earning almost nothing. That’s common sense. Put the calculator away. That’s just common sense. And, when interest rates go up, like they’re starting to now, you lose money in your bond funds. So, mathematically, to say that you should put your safe money in bond funds when interest rates are at 100-year lows, that is a breach of common sense. That’s like a math teacher telling you that two plus two is 20.
BRIAN: So, we wanna make sure that you know, Decker Talk Radio listeners, if your financial advisor is putting your safe money in bond funds when interest rates are this low, and you have 100-year low rates to pay you, you also have 100-year high interest rate risk to hammer you when interest rates go up and you will lose money when interest rates go up on your bond funds. That is mathematical. It’s demonstrable.
BRIAN: All right, the strategy for your stocks is to buy and hold. Buy and hold is something that I wanna talk about probably for 15 minutes. This is so bad. Buy and hold is when you are told to ride out the markets. We’re long-term investors, let’s be tax efficient and just hang on, and in your 20’s, 30’s, 40’s you can do that because you have a paycheck coming in.
BRIAN: When you’re retired and your financial advisor tells you to ride it out, what are they doing? They are telling you to keep your money at risk because that’s how they get paid. They don’t get paid when you pull money out of the risk bucket because the markets are cratering like in ’08, and you try to salvage some money and protect capital. They don’t get paid on your safe money that’s in the money market or CD’s. They do get paid by keeping you in the markets. Is it in your best interest? Heck, no. It’s in their best interest.
BRIAN: Buy and hold pays their bills. It’s not in your best interest, point number one. Point number two on buy and hold is, when you’re drawing money, and we’ve already made this point, I’m gonna move off this very quickly. When you’re drawing money on a fluctuating account, you’re committing financial suicide. That’s point number two when you’re retired. Point number three, buy and hold is when you take a hit. Stock markets cycle every seven or eight years. So, I’m gonna go through these cycles very quick, and tell you how long in the tooth we are.
BRIAN: Right now, Decker Talk Radio listeners already know that we have pretty good cycle of every seven or eight years. 2008 was the last time the markets dropped over 20 percent from October of ’07 to March of ’09, the stock markets dropped over 50 percent. Seven years before that was 2001. That was the middle of a three-year bear market of over 50 percent. Twin Towers went down, 2001 was a rough year.
BRIAN: Seven years before that was 1994. Iraq had invaded Kuwait, there was a recession, interest rates spiked, the stock market struggled. Seven years before that was 1987. Black Monday, October 19th, that was a 30 percent drop in one day. Seven years before that was 1980, the start of a two-year sky-high interest rate environment, horrible recession for the economy, and over a 40 percent drop in the markets.
BRIAN: Seven years before that was ’73, ’74. That was over 40 percent drop in the market and seven years before that was ’66, ’67 bear market where that was over a 40-percent drop and it keeps going. So, Decker Talk Radio listeners, every seven or eight years, the markets get creamed. The markets bottomed in March of ’09 and we are in year nine right now of this cycle.
BRIAN: The longest cycle in our U.S. stock market history was in the ‘90’s when the markets went 10 years without a 20-percent drop. We are in year nine. In other words, we expect in the next 18 months that the market cycles will just keep cycling. What can cause a market cycle? It can be geo-political, it can be a terrorism event, it can be caused by interest rates going back up. A stock market crash can be caused by economic data. There’s a number of pins that can burst the stock market bubble.
BRIAN: By the way, there was one bubble in ’01 and ’02 that burst and that was the tech bubble. There was one bubble that burst in ’08. That was the mortgage disaster that happened. There’s four bubbles right now that are all bubbles that will burst that were caused by the federal reserve bank keeping interest rates artificially low. I don’t wanna spend too much time on this ‘cause I wanna get back to hammering the bankers and the brokers, but one bubble is caused by the G7 nations, the countries taking on debt.
BRIAN: Debt levels, when they go past 100 percent of GDP, are a problem. Historically, that’s a major problem for these countries. We are there. All G7 nations are beyond 100 percent of their GDP in debt. Number two bubble is the bond market bubble. When interest rates are this low, we have some bonds that are negative rates and zeros rates. At some point, when rates go up, the bond market bubble is going to burst and that will be a problem for people that will lose double-digits with their safe money as investors and retirees.
BRIAN: Number three bubble is the real estate market. With low interest rates, real estate prices are very high. We know this mathematically because of something called the Affordability Index. The Affordability Index is where you take King County, where we live here, and you look at the average wages in King County. That number is “X”. What can the average wage buy in King County right now in today’s rates and mortgage situation? We’ll call that “Y”, to represent the average home price that can be purchased with average wages.
BRIAN: And then, we look at the average home price in King County and that’s “Z”. The negative gap between Y and Z has never been bigger, even in 2006. So, what we’re saying is that mathematically, the home price rise is unsustainable in King County and also in many of the west coast cities, many of the major metropolitan areas around the country. It’s a bubble. It’s a real estate bubble that’s going to burst. Typically, that’s burst by higher interest rates or interest rates moving back up.
BRIAN: Fourth and final, is the stock market bubble. The stock market right now is trading at over 25 times earnings, which has only been surpassed twice, one in 1929, that didn’t turn out well, just saying, and the other time was in November of ’99, right before the tech bubble burst. So, we are in stratospheric valuation territory in the stock market. Higher interest rates are a pin that can burst all four bubbles.
BRIAN: So, we’re being very protective for our clients’ risk money because the number one destroyer of retirement is stock market crashes. In 2008, when people were told to pull money of their portfolio based on the four-percent rule, a lot of people had their retirement destroyed because in ’01 and ’02 when the markets lost 50 percent, these retired clients lost 50 percent, plus they drew four percent.
BRIAN: So, now they’re down 62 percent in 2003. But the good news is the markets double from ’03 to ’07 and so that’s great news, but you’re drawing four percent a year and then you take the four percent hit, plus the -37 in ’08 and now can no longer stay retired. And we saw proof of this because the grey-haired people that came back to banks, fast food, retail, Wal-Mart, they had to go back to work because their retirement was destroyed.
BRIAN: Yep. All right, so, buy and hold is a problem for people in retirement. And the amount of risk that bankers and brokers will have you take is a problem for people in retirement. They’re getting bad financial advice by having people take way too much risk. The typical client… you’re gonna pipe in?
MIKE: One thing that baffles me is, buy and hold, in my opinion, doesn’t take much expert advice. Follow the indexes… I mean, am I crazy to say that?
MIKE: I mean, you’re not buying and selling, you’re not trend-following, you’re just buying and holding. Anyone can do that because you’ve got e-Trade and all these other companies that just make it accessible to you.
BRIAN: Okay, so let’s talk about this. We would say that if you’re paying a banker or broker a fee to buy and hold, you’re making a huge mistake. Why don’t you do that? Why don’t you just buy the S&P? Why don’t you buy the NASDAQ? Why don’t you buy the EFA, which is the European index, and why don’t you buy the EEM, which is the emerging market index, and maybe the AGG, which is the Barclay’s 30-year bond index, and let ‘er rip?
BRIAN: Why don’t you just do that? Because, by the way, the S&P outperforms 85 percent of money managers and mutual funds every year. And if your advisor is telling you to buy and hold, then why don’t you just do it yourself? Vanguard, Fidelity, and Schwab have something called robo investing, where you’re daily rebalanced and your automatically invested in the indexes, keeping fees low. There’s no management fee.
BRIAN: There’s just a small fee on the ETF’s, but if you are paying a fee to your broker or your financial advisor, and they have a buy and hold strategy, you might as well do it yourself. It’s a no-brainer. It’s called robo investing. You’re uninformed, I would say, if you’re paying a broker a fee to do that. So… I gotta just keep going into this, this is so bad.
BRIAN: I remember I was ready to go play basketball… this is 25 years ago, down in Seattle. And we were ready to play at the WAC, Washington Athletic Club, and a friend took a call and said, hey, gotta take this call. And it was someone who wanted to sell 1000 shares of General Electric. Now, back then, there was no Schwab. Those people paid hundreds of dollars in commissions. And so, he took the call and said, yeah, I think this is a very important move, let’s sell and lock in your profit on General Electric.
BRIAN: And then, I said, all right, let’s go. And then, the phone rang again, and he says, I gotta take this call. So, I stand there and wait for ‘em, and it was another client, another guy, who wanted to buy 1000 shares of General Electric, and he goes, yep, I think that’s a smart move. And he took the order and sent it in, and I said, what just happened there? And he goes, I’m not gonna try to talk the client out of doing something, then I’ll be wrong. Let that sink in.
BRIAN: So, at the bottom of the market, when you’re afraid and you wanna get out, the broker usually has you fully invested at the top of the market and all in CD’s at the bottom of the market, which is typically why the individual investor doesn’t have a chance.
MIKE: Well, let’s put this in a medical situation. Do you want the patient telling the doctor what to do, or the doctor telling the patient what he should do? You don’t want the investor that uninformed to be making all the decisions, you need to have that advice.
BRIAN: Well, there’s a third option. Or the doctor is telling the patient what to do and prescribing things that he’s getting paid the most on, not what’s benefitting the patient the most. I think that’s…
MIKE: Which is deceptive.
BRIAN: Yeah, which is dishonest. Okay, Decker Talk Radio listeners, why do the brokers sell your winners? So, when Microsoft in the 90’s was going up and that stock was sold, or you have a stock like Amazon that’s gone up, why do bankers want to sell your winners and hold your losers? Do you know why? I’ll tell you why.
MIKE: Yeah, I’m at a loss here.
BRIAN: Okay. It’s because they want to say that they’ve made you money. So, what happens is, when you get a new relationship with a banker or broker, in 18 months, all your gains will be locked in and you will be stuck with 12 to 18 different stocks that are all losing money now, and you’re supposed to wait because they’ll come around. And when they do come around to a 15, 20-percent gain, they will be sold and, let me just say, you’re holding your losers ‘cause you’ve gotten rid of all your winners.
BRIAN: There was a guy in New York who wrote an article, I’ll never forget. He hired this guy who used what’s called a buy low-sell high strategy, and everything that came down, he thought was a bargain so he bought it for this guy, and things that came down, came down for a reason. They came down because there was an earnings disappointment, or the company became uncompetitive, or that they took on too much debt, or a new competitor had come into the market, a whole bunch of different reasons.
BRIAN: But, the stock was going down and, of course, never bought anything that was going up, because the things that are going up are too expensive, but the things that were going up tended to keep going up, and so did the indexes and so did the markets. And so, this guy lost this guy tons of money, a quarter of a million dollars of his one million dollars before he said, time out, let’s try a new strategy. Never buy anything from my account that’s not on the new high list.
BRIAN: So, he switched from buying low, selling high to trend-following, and he made his money back within a year, and he made tons of money after that. Trend-following models is what we use for our clients by the way. Here’s how we decide to invest our risk clients. Did you wanna say something?
MIKE: But the client had to give that advice to the broker.
BRIAN: Right, ‘cause the broker is trained to buy low-sell high. So, buying low, selling high has you buying retailers right now.
BRIAN: Retailers have been crushed. Buying low, selling high had you buy real estate in ’08, and you lost the RIT’s. Some of those RIT’s were down 75 percent. You took major hits. Did it eventually come back? Yeah. When you lose 75 percent, it takes you a long time to earn that back. I think you have to have a triple before you get your money back. As a matter of fact, I don’t think that’s mathematically true. You have to triple your money when you lose 75 percent.
BRIAN: So, anyhow, that’s the background of why brokers will sell their winners and keep their losers. The way we invest our client money is that we’re fiduciaries, so we go to the biggest databases in the country. We go to the Wilshire database for money managers. We go to the Morningstar database for mutual funds, and we also include timer, track, and theta. And we just wanna know who, net of fees, is producing the highest returns for any years at least starting before 2008.
BRIAN: We wanna see how they did going through 2008. And all we care about, Decker Talk Radio listeners, is two things. Track with the S&P when the markets go up. That’s not an easy task because 85 percent of money managers are mutual funds don’t do that, and number two, protect principal when the markets go down. So, the stock market is a two-sided strategy, it goes up and it goes down. And for reasons that make no sense, most people in this country have a one-sided strategy in a two-sided market.
BRIAN: And so, they make money until the markets go down and they take these major hits. So, because we are a fiduciary, we have a two-sided strategy in a two-sided market. We’ve done our homework. We have looked for the best five or six managers, based on net-of-fee return, and we plug those in. So, we have right now, three managers and two mutual funds in our strategies, and every quarter, when we do the search again… this week, I’m doing the search again for this quarter.
BRIAN: We get around 60 that legitimately beat us, but we can’t use ‘em. Number one, the first group, yeah, this guy’s beating us, but he’s closed to new investors. We can’t use that. Number two, well, they’re a hedge fund and we’re not gonna use a hedge fund for client retirement money. And the reason why is because hedge funds have a bad habit of going for broke, taking too much risk, and imploding. Number three, yeah, they’re beating us, but their per-account minimum is three million or more.
BRIAN: And number four, volatility is an issue. So, number four, there’s two mutual funds, the Bruce Fund and CGM Focus, that legitimately, mathematically, deserve to be on our platform, but we can’t use them because in 2008, they both lost over 40 percent. So, what we have, the five or six managers that we use, are mathematically the best managers that we can find and they have a two-sided strategy in a two-sided market. Decker Talk Radio listeners, if you haven’t been listening, listen to this.
BRIAN: The managers that we are using made money in ’01 and ’02 when people lost 50 percent. And then when the markets doubled from ’03 to ’07, they did too, and collectively, when the markets tanked in ’08, these collectively made money. And when the markets are up 150 percent, from ’09 to present, these are tracking with the indexes. So, we, as fiduciaries, plug the best-performing managers we can find into these slots so that, if the market tracks up, we track up with the market and if the markets tank, then these models go into protection-of-capital mode.
BRIAN: They’re not principal-guaranteed, but they can protect you. Okay, we’ve only got a few minutes left. Mike, I wanna make sure that clients know how to avoid a Bernie Madoff situation. Do you remember Bernie?
MIKE: Bernie Madoff, I do.
BRIAN: Okay.
MIKE: Yeah, we’ll open the books and be transparent to you.
BRIAN: Let me give one other number. 100,000 dollars invested January 1 of 2000, for the S&P 500, dividends reinvested, grows to a little over 200,000 dollars, average annual return is around 4½ percent for those 16 years.
BRIAN: 100,000 with the managers that we’re using, grows to over 900,000, average annual return is around 16½ percent net-of-fees. So, we wanna make sure that when you come in, and you see these managers, we’ll be very transparent. These are the managers that we use for our clients right now in retirement.
MIKE: Absolutely. Let’s finish up with Bernie Madoff.
BRIAN: Okay. Bernie Madoff was the biggest Ponzi-scheme operator in the United States’ history. He was set up in a way that we wanna warn you about because it’s not illegal. I can’t believe this is not illegal.
BRIAN: But, he was called a self-custodied operator, which means, that if you wanted to do business with Bernie Madoff, you wrote Bernie a check, and he had access to your funds. He produced his own statements. So, he could say that the returns were anything he wanted them to say. I can’t believe that that’s not illegal, but it isn’t. So, if you have your retirement money or your investments with someone who is a self-custodied operator, we hope that you pull the funds today because there’s all kinds of room and incentive for fraud.
BRIAN: We are not a self-custodied operator. We have a custodial relationship with our clients, which means that, when clients finalize their plan and wanna fund it, accounts are transferred. We use TD Ameritrade, and TD Ameritrade acts as the Fort Knox over their money. They guard the money to make sure that only the client has withdrawal power, not Brian, not Mike, not anyone in our company. Those accounts are locked down and protected by TD Ameritrade or Charles Schwab or Vanguard or Fidelity or Scott Trade.
BRIAN: Those are custodians that are hired to protect your money and make sure that access is only granted to the account holder. So, we could never do to clients what Bernie Madoff did to his victims. So, that’s a very important custodial relationship. So, Mike, the last couple of minutes that we have here… do we have two more minutes?
MIKE: We do, two more mins… Well, one more minute, actually.
BRIAN: Okay. One more minute. We hope, at Decker Retirement Planning in Kirkland at Carillon Point, that you take your retirement seriously, that you only deal with a fiduciary, that you have a plan to protect the down-side of your investments of all that you’ve worked for, and that you don’t take too much risk. A measure of rule of thumb for us is, around 25 percent of your money should be at risk, 75 percent of your money should not be at risk. And we’re getting good returns on our principal-guaranteed accounts. Our best principal-guaranteed account, last year, made nine percent.
MIKE: So, I’m gonna close up here really quick. Do you wanna to refer to our website? We have tons of content, articles, information on there, www.deckerretirementplanning.com. Also, if you like this show, you can hear all of our past shows, or subscribe to us via podcast on Google Play or iTunes. Until next week, take care, be warm out there, and we’ll be in touch next week.
