Send This to Someone Who Trusts Big Firms or Their Job To Get It Right

Paul Winkler: Hope you’re doing well. Jim Wood is here with me, and we’re both wondering why are we inside when it is so … well, it’s been nice outside for a long time, so I guess we can take one day to come in here.

Jim Wood: Any way to do the show outside?

PW: No, I don’t think so. Well, I suppose we could.

JW: You look at birds.

PW: That’d be fun.

JW: Dogs barking.

PW: Yeah, dogs barking. I don’t know. There are no dogs around here. It’s not going to happen.

Navigating the Fog of Investing

PW: So there’s a lot of stuff I think would be fun to talk about today. It’s been an interesting, interesting week, as most of them are, it seems to me. But one of the things that I like to do, and this week is no exception, is do a little bit of research on what you might be seeing out there and things that you might be seeing out there that you don’t know how to place.

I mean, “What do I do with this thing right here? This is what’s getting pitched to me, and how do I take this and process it? Is this something I should pay attention to? Is it something I should ignore?”

“Is this something I can just go, ‘Forget it. This is just marketing’?” As so much of investing information is.

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So much of what we get about investing is just plain marketing in disguise, very little education. 

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But it reminds me of, Jim, when we had “Navigating the Fog of Investing,” and they had these hidden camera interviews. That just hit me. It just hit me.

“Navigating the Fog of Investing,” it was a documentary many, many years ago. It was put together by some people that we know.

I was in upstate New York visiting parents and got a call saying, “Hey, Paul, can you come to Cincinnati to do an interview for this? Do it from a financial advisor’s perspective.”

Because they had John Bogle, founder of Vanguard on there. You had Harry Markowitz, Nobel Prize-winning economist on there. There was an attorney, a securities attorney, and he and his partner were both involved in this just horrendous lawsuit where this guy was just taken advantage of by a big investment firm.

It just went back and forth. It was so sad because you go to arbitration. And an arbitration when it comes to investing is when you sign a contract to go through and have an investment advisor handle your stuff, you have arbitration.

And that is where you have a few people in the room. It’s not handled before a jury and a bunch of people in a room. It’s handled before people that are in the industry because supposedly a regular jury wouldn’t know what to do with the information. So they need to have somebody that is in the industry to help litigate and help come up with a decision as to what’s right.

Well, of course what happens when you have a bunch of people in the industry deciding whether you have a case or not, sometimes it doesn’t necessarily go the way of the client. Let’s just put it that way.

Protection from Investment Firms

PW: I remember the female attorney, she was just beside herself because this guy had basically retired and he had a tremendous amount of money in a very concentrated position, not unlike what we see now so often with people that are chasing technology stocks right now, and they don’t even realize it. They’re buying S&P 500 funds and not recognizing that most of the money is in just a few stocks, and they’re not recognizing this.

Then he comes out and he says, “Well, I thought they were to protect me, that they were going to take care of me.” And of course not. That wasn’t how it ended.

And this guy barely got his attorney’s fees back. That was about it. It wasn’t a whole lot, and he was having to do another job all the way through retirement, although he had millions of dollars when he retired. He was having to do this other job just to make ends meet.

So it was sad that was the case. But in there, they had these hidden camera interviews with major investment firms, and you’d know exactly what investment firms they were if I named them, but they were major, major investment firms.

This is my pet peeve is so often people think, I’m working with a huge firm. They ought to be doing what’s right because they’re so big that how could they possibly get away with doing anything wrong? 

The reality of it is, if everybody’s driving 80 miles per hour in a 70-mile-per-hour zone, nobody is going to get pulled over. And that’s kind of the way it is in the industry.

When you sign up for these investment management agreements, you’re signing an arbitration agreement, and you’re signing that you’re okay with whatever they’re going to do. And one firm, a lady actually came in here and she said, “Here, I’m looking at this firm, these guys, I was talking to these people, but I thought I should come talk to you first and do that.” And I said, “Bring in the contract. Big investment firm, bring in the contract.”

They had literally, in their contract for asset management, abdicated all the responsibilities. “You’re responsible for rebalancing the portfolio. You’re responsible if there are changes in the assets.” And I was flabbergasted at how much they had basically walked away from responsibility regarding in the management of the portfolio.

So they were doing these hidden camera interviews. I promise I’m going to get back on point, Jim.

JW: Making a big circle.

PW: I’m making a big circle. But they’re doing these interviews, hidden camera interviews.

And what was so fun about the documentary is that they had hidden cameras, and this person would say, “I’m the quarterback.” They’re using these metaphors to explain what their job is as the investment advisor. “I’m the quarterback and you are the …” whatever. Or, “I’m the coach and you’re the player,” or whatever.

But it was these metaphors, and it was bing! Sales pitch, no education.

“And we’re going to go out and we’re going to actually find the best companies for you to invest in.” Bing! Sales pitch, no education.

“And we actually have a track record of blah, blah, blah.” Bing! Sales pitch, no education.

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It was point after point that people were just being indoctrinated. They were not being educated when it came to investing. 

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And so often what happens is that people get frustrated with that type of thing.

Having Multiple Financial Advisors

PW: I was thinking about this today too: What do people do to protect themselves? I will never forget, I was at the radio station one day, and there was a guy that was a football player for the Tennessee Titans, and this guy was super, super successful. And we got in a conversation, and I said, “What is it with you guys?” And he was like, “What?”

And I said, “Seventy-two percent of you’re bankrupt two years after leaving the league. You make all this money and yet you’re bankrupt two years after leaving the league. What gives?”

And he started going, “Well, Paul, it’s like you have all these opportunities. You’re making all this money. You think it’s going to come in forever and basically people are coming around.”

I said, “Yeah, you’re all the rage, or you’re like the Styx song. The fun never ends. You’ve got dozens of friends. Fun never ends as long as you’re buying, right?”

And he goes, “Yeah, that’s exactly it.” So no sooner do he and I stop talking, he goes on the radio and one of the guys at the sports station says, “So, so-and-so, man, you’ve got an apartment in Nashville, a really nice place. You got this place in Franklin and you got another place in California, don’t you?”

And I turned to one of the guys at the station. I just said, “That’s it. That’s what I was just talking to him about.”

They spin themselves into oblivion thinking this money will come in forever. And it probably wasn’t a couple of years though that he was out of league, right? Go ahead, Jim.

JW: No, no, no. I was just … go ahead.

PW: So one of the things that he said when he was in the interview was this. They said, “So you got a financial advisor.” “Oh, yeah, yeah. I’ve got a financial advisor.”

I’m thinking, Yeah, no. “I got two of them.” And he said, “So why do you have two? What are you doing with two financial advisors?”

He goes, “Well, I have one watch the other, and the other one watches that one just to make sure neither one of are messing up.” I go, No. 

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One is lying and the other is swearing to it. 

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That’s what I’m thinking. That’s what’s is going on in the back of my mind, right?

And so often you hear that, where somebody has multiple advisors. I think there’s safety there. And one of the things I point out quite often regarding that is you ought to have second opinions.

When People Think They’re Diversified

PW: As a matter of fact, there was one lady I was actually talking to a few weeks ago, and I said, “Go interview every financial person that you can talk to. Go to every dinner that you can go to. Go to every office and go interview everybody that you can and then come talk to one of my guys last.”

So I sent her to one of you guys and one of the other offices. And basically what happened, she came back to me afterward and she says, “Well, I went and started working with your guy.”

And I said, “So tell me about what was your experience like?” And she told me there was all this crazy stuff.

But what she did was this. She went and talked to many, many people, and that’s really, really good, number one. But here’s the other thing that she didn’t do that sometimes I’ll see people do, which is they’ll have multiple financial advisors or multiple investment accounts all over the place, and they think they are what, Jim?

JW: They think they’re diversified.

PW: Exactly. They think they’re diversified.

So one of the things I was thinking about as I just started the show today is, let me just take for example, T. Rowe Price Spectrum Moderate Growth Allocation Fund.

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So this is an asset allocation fund. They’re dividing the portfolio amongst all different types of stocks and bonds, and they’re managing the portfolio. 

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It is a one-stop-shop investment alternative for T. Rowe Price. Then you take Vanguard Life Strategy Growth Fund. That is a one-stop-shop fund that was just designed for somebody that has a growth goal in their portfolio. It is a fund of funds, so it’s a fund that owns multiple mutual funds.

And then I took Fidelity Asset Manager. And for the sake of time, I only chose three different asset managers, big ones, just to make this point. Because I think this is important for people to get.

Then what I did is what is called an overlap analysis. You think you’re diversified, right? NVIDIA, Microsoft, Apple, Amazon, Meta, Taiwan Semiconductor, Alphabet, Broadcom, JP Morgan, Tesla, Visa, Netflix, Berkshire Hathaway. These are all holdings of these portfolios.

Now, NVIDIA is held by the Fidelity Asset Manager fund, the T. Rowe Price Spectrum Fund, and the Vanguard Life Strategy. So that’s held by all three. Microsoft is held by all three. Apple is held by all three.

Amazon is held by all three funds. Meta is held by all three funds. Taiwan Semiconductor is a foreign company owned by all three funds. And then you’ve got, Broadcom is held by all three funds.

And you’re getting the point, right? You think you are diversified.

The Illusion of Diversification

JW: I’m also guessing that, and you’re probably getting to this, I might be jumping the gun, is that they’re overwhelmingly invested in large U.S. growth.

PW: Oh, no question. No question. That’s mainly what they’re invested in.

JW: In this diversified supposedly group of funds.

PW: No question. So it really wasn’t going to get to that, but I’ll get to that. Since you brought it up, Jim. I mean, it really is a point worth making.

So you take that first fund, the T. Rowe Price Fund, and you look at the asset mix, and you got 51% of the money in the U.S., one country, 26% in non-U.S stocks. You got fixed income. You literally have 1.22% of the portfolio in micro or small companies and only 4% in small companies in that portfolio. So you really don’t have diversification between different size companies.

If you look at the Vanguard Life Strategy Fund, that fund is, let’s see … 1.16% micro, 4.28, almost identical in the asset mix between small companies and large. The rest of it is large or very large companies.

You only have 2% of the portfolio in small value. That is where you have the highest expected return in an investment portfolio. Two percent of your money is in an area that has the highest expected return.

And this is a growth fund for who? People that presumably want their investments to what?

JW: That would be grow.

PW: That would be grow, yeah. We’ll take growth for 250.

Then you got the Fidelity Asset Manager Fund. What is that sitting in?

That is sitting mainly in U.S. stocks, a little bit of international. Oh, they have a full whopping 2% of their portfolio in micro cap stocks and 4% in small caps, 3%, 1% more in small value where you’d have the highest expected return. So it is an illusion.

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It is an illusion that they really have you diversified, and it is an illusion that there’s greater safety in having multiple investment managers. 

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And you’re smiling, Jim, so I know that you’ve got something wiseacre to say. Go ahead.

JW: Well, I’m just thinking, “We have every color you like as long as you like green.”

PW: Oh, yeah, there you go. It’s Henry Ford on investments. “You get to have any colored Model T that you want as long as it’s black.”

Yeah, exactly. That is precisely what we’re dealing with here.

Default Choice Funds from Employers

PW: The thing is that investors don’t realize it. They don’t recognize this is what’s happening when it comes to choosing multiple different investment managers, and they don’t really know that it’s happening because the reality of it is they’re not really getting educated. They’re getting sales pitches every time that they go in and do this type of thing.

JW: And everything you’re saying applies to target date funds as well in terms of the lack of diversification.

PW: That’s correct.

JW: The overlap between target date funds. They all have the same type of mix.

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They’re all large growth heavy, short on small caps, don’t have a value tilt, all those same things. No matter which company you look at, it’s the same stuff.

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PW: It really is. And those are funds that are typically the default choice that you have when you go to work for an employer. You’ll typically just go in there.

And that’s why I always tell our clients, “Bring the funds in that you have access to. They will give you access to other things.”

Because they know what we know, that down the line, 20 years, 30 years, you’re sitting there on a fraction of the amount of money that you should have had because you weren’t diversified, because you were so concentrated in bigger companies, because you were so concentrated. And you could go 10, 20 years with no return in large U.S. stocks.

If you’re sitting there at that point down the road, you’re going to go, “Wait, wait, wait, wait. I gave you guys … I told you to manage this money for me and you blew it and you did this,” and you can’t sue them because of what’s called 404(c). That is the code that basically says, as long as they give you enough options, you can’t come back at them. So, again, the investment industry has protected itself against them having ramifications and for you, for any kind of retribution that could happen where you go back at them and say, “This is wrong.”

JW: Fun little statistic, by 2027, target date funds will capture 66% of all 401(k) contributions and of about 46% of total assets.

PW: Now, I know with Vanguard, they had somewhere in the neighborhood of 60% already, and that was probably five years ago. So that doesn’t surprise me that it’s all assets, and most people don’t realize it’s happening.

The Job of the Investment Manager

PW: So this is a segment to send all your friends who think, Oh, everything is going to be great because I am working with big investment managers and my workplace has chosen them. Recognize that I don’t know of one target date fund. Not one, not one fund family, not one anywhere, that really diversifies in a way that I would consider prudent, where you’re dividing between big companies and small companies, you’re dividing between value and growth.

They typically tilt toward very big companies. And you go, “Well, why would they do that, Paul? Why would they do that?”

And the reason is because you’re more familiar with those companies and you’re more likely to stick with them. And their job mainly is this: Make you money? No.

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Recognize their job is to get your money under management and keep your money under management. 

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Those are the two jobs of the investment manager.

JW: I think one reason too why they tend to be more conservative than you would otherwise think is for that.

PW: I don’t think that’s conservative, though.

JW: No. But when they tend to have higher bond allocations.

PW: Yeah, higher bond allocation, yes. You’re right.

JW: Then I would suggest at each age. And they do that to control volatility, which keeps people from going to the exit during volatile markets.

PW: I think that’s a wonderful point. That’s a really good point, Jim, because you’re exactly right. They do. That has been one of the criticisms that they go way too much into fixed income too soon for most investors.

Now, there are a few people that might actually make sense for, but for most people it’s way too much. And the reason being is that if you get a little bit nervous, you’ll fire them a lot more quickly.

When indeed markets do what they do. They go off and they go down. The average market downturn, when they happen, they don’t last that long historically.

Now if you’re not diversified, they can last a long, long time. Let me make that point right there.

All right. I’m going to take a quick break.

Financial Advisor Education

PW: All right. We’re back here on “The Investor Coaching Show.” I’m Paul Winkler, along with Jim Wood. Jim Wood, certified, certifiable financial planning professional.

You see those new commercials on certified financial planners. They’re doing all these commercials. I forgot, one was like they hired an electrician, the person didn’t have a degree, and they got electrocuted.

So then they go, “Are you certified?” They have a nightmare about that happening. “Are you a certified financial planner?” “Yes, I am.”

Well, Jim is. Okay. I think it’s good. I think the education is good.

There’s only one beef that I have that I will publicly speak about. The degree programs for financial planners are so often driven by, again, who sends students to the colleges, which is quite often the big investment firms. And a lot of times they’re a little bit light on the academic side of investing principles.

But other than that, when it comes to tax stuff and planning, I think it’s really, really good. Social security, education, risk management education, estate planning education, I think is great.

JW: You said you had one beef. I have an additional beef.

PW: Do you?

JW: Yeah. They keep raising their fees.

PW: They do keep raising their fees. They’ve got to pay for all those advertisements.

JW: Yeah, that’s exactly it.

PW: They’re doing a lot of advertising. I don’t know how much benefit that is.

But I think when you are choosing a financial advisor that you want to make sure that they have the degree of chartered financial consultant or certified financial planner at a minimum. And I like for people to go on and really get some kind of academic training behind that regarding investing, because I think it’s a little bit light on that.

And they have to be. The big investment firms would not send anybody to go get those degrees.

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If they really tore apart some of the practices being done by these big investment firms, they’d have no students. 

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So you just got to be buyer beware.

JW: Yes. And it’s funny because I was just talking the other day about my transition from the broker-dealer world to what we do.

And part of that was because when I started studying academics, and I was still at the broker-dealer I was at, I was trying to get this through, and said, “This is what I want to do.” And so I’d submit all the materials and things and try to get them approved.

And they wouldn’t approve them because they were saying essentially that “you should do this academic process and you shouldn’t gamble and speculate.” And they can’t approve that when everybody else in the firm is doing exactly that.

PW: Oh, yeah.

JW: So they wouldn’t approve any of the materials for that very reason. So there’s nothing wrong with what it’s saying. There’s nothing that was untrue or anything like that, but they couldn’t talk.

I mean, they felt like they were talking out of both sides of the mouth. “We can’t say you should do this academic process when we’re letting everybody else tell you that they can stock pick and market time your way to success.”

Trust Your Gut

PW: Well, it’s funny because I’ve seen in some of the colleges, you’ll have a professor that’s very pro-annuities. And then I just had no respect for those people because I thought that they were very data light in terms of backing their stance on that.

But you had some of the teachers that were, “No, this is nonsense.” It was funny because you had some people that were thinking inside there, and the ones that were really thinking were really frustrated because they end up leaving the college.

JW: And you find out some of the ones that are pushing annuities are captured by the insurance industry.

PW: Oh, yeah. And even the insurance industry, the colleges are run by people that are ex-insurance executives. That’s very frustrating.

But anyway, so you wonder why you get some information that seems to be academic in nature, backing those things, and you hear me going, “No, nonsense, nonsense.” I always tell people, “Trust your gut. Trust your instincts.”

When you put money in an insurance contract, if somebody is telling you that they’re going to give you a high return with no risk, that there is no risk, recognize that there is no such thing as a free lunch. It’s just like anything else in life.

It is not possible. You cannot get those things. When you hand the money to an insurance company, they’re going to turn around and they’re going to invest it.

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If they’re going to guarantee what you’re going to get back, that you have absolutely no volatility, they can’t be investing in anything that has any volatility. 

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Therefore you can’t be getting anything that would have any higher expected return than a bond or a fixed income investment. Recognize it. Realize that your gut is probably your best friend when it comes to this stuff. Be very, very careful.

As I did last week where I played an educational video. It was an educational video teaching people how to sell annuities, indexed annuities. And basically what this guy said is, “I’m not very smart.”

This was the salesperson. And I’m thinking, Wow, are you kidding me? Are you kidding?

I actually played that for a friend of mine. It was hilarious. He’s actually listening as I’m doing this.

Let me see. Oh yeah, there it is. Here it is right here. Check this out.

This is what he said. He was talking about the sales presentation that he’s about to give or that where he learned his sales presentation to sell annuities. You just got to hear it.

Frank Eufemia: I’m going to start with just a simple presentation. If you guys went to any of the training camps or the conferences, the fall sales or the spring sales conferences, you would’ve saw this.

But it’s a 10-minute presentation, and for me, simple is easy. I loved Rougier. I thought he was a great trainer. He was a genius, in my mind.

But when he spoke, the way he spoke, the language he used, I’m going, “I can’t say that. People are going to look at me and go, ‘You got an earpiece thing. Somebody’s telling you what to say, because you’re not that smart.’” And our clientele is not that way either in this fine market.

PW: “My clientele is not very smart either.” Right from the horse’s mouth, somebody is selling this stuff.

Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.