The following is the transcript from Episode 12 of Retire Happy with Roger Gainer, a financial and business audio podcast.
Roger: A lot of people are just plain intimidated and overwhelmed by this decision making process and understanding what they\’re investing in. So this is my great concern is cutting off a large chunk of our population from really the financial education and support that they need to be successful.
Clark: You\’re listening to Retire Happy with Roger Gainer, President of Gainer Financial and Insurance Services, Inc. Thanks for joining us. I\’m your host, Clark Buckner. In today\’s episode we\’re going to learn more about a fiduciary rule, recently put in place by the Federal Department of Labor and how it\’s gonna affect the advisors and clients when it goes into full effect at the beginning of 2018.
Along the way, we\’ll also dive into the world of Robo-advisors. What that means? We\’ll get to that. And how conflicts of interest can play an unexpected part in the world of finances. For more content like this, be sure to visit gainerfinancial.com. Enjoy the show.
Roger, welcome back. I\’m so excited to talk with you today about an interesting topic. I\’ll kind of tee it up in just a moment. But first, how are you doing?
Roger: Oh, things are great, you know. Summer seems to have exploded on the scene and it\’s just a great time of the year. A lot is going on and we had a great client appreciation event last week. People had a great time and it\’s just our way of saying thank you. And it just kinda opens up the summer season where it\’s just non-stop. Good things going on.
Clark: Well, speaking of summer, you went on vacation recently, right?
Roger: Well, actually we went to a dear friend\’s, kind of our godson informally, his graduation from University of Colorado in Boulder. So that was great. It was a great weekend. I hadn\’t been back to Boulder for many, many years. My wife had never been there and…it\’s just a great little town.
Clark: Wow, I love that. Well, good. I\’m glad that we\’re back together and I\’ve got a topic in mind that would love to have your clarity on. So recently in the years, and there\’s a lot going on in the news these days, but recently in the years there\’s a new set of rules of the fiduciary standards.
Roger: You mean the Department of Labor rules that went into effect last week?
Clark: Right. So there\’s like a new standard for advisors. There\’s a lot of different opinions and perspectives on it. So with these standards…you know, what are they? What challenges does it create for both advisors like you and customers who are looking to plan for retirement? People who are trying to navigate, can seem very daunting and very overwhelming.
Roger: Well, you know, like any major shift in policy regulation, really in any endeavor, it takes a while to figure out exactly how it\’s going to affect everybody. You know, when we had the healthcare overhaul a few years back, we didn\’t know what that was going to do to premiums exactly and now we know. We\’re a few years down the road. I kinda call that the law of unintended consequences.
But with this rule, we\’ve changed the nature and the format for providing advice to folks about their retirement accounts. So this is a Department of Labor Fiduciary Rule. And it went into effect last Monday except it didn\’t fully go into effect last Monday because they\’re still taking a commentary, the Department of Labor. They\’re still writing out some of these regulations and fleshing them out. And the full rule won\’t be implemented and in place until January of next year. So we have some early parts. There\’s some new disclosures that we have to offer. But I think maybe it will help people to understand what is different. What does it mean to be a fiduciary?
Fiduciary, the short version is I have to put my clients\’ interests before mine. And I know a lot of people thought, \”Well, wasn\’t that the way that it was always supposed to be?\” I voluntarily became a Fiduciary about 10, 11 years ago. I gave up my registered rep broker\’s license, and I\’m a fee-based financial planner now. And up until last week, about 15% of the industry operated voluntarily under the standard by becoming a registered investment advisor or affiliating with a registered investment advisor as an investment advisory representative, which is what I am.
So what that means is simply we sign an agreement with folks and I can do comprehensive financial planning for people looking at taxes and estate planning, risk management to, yes, investments and other business agreements, etc.
This is a more specific rule because it just regulates how advisors have to act in relation to helping people with retirement accounts. So what are those? IRA\’s pretax contributions, deferred compensation plans that are ERISA plans, not deferred compensation that isn\’t 401k\’s, money purchase plans, SPEs, SIMPLE plans, and the like. So anytime you have money in a retirement account and you sit down with an advisor to discuss what\’s in the account, this fiduciary rule is what\’s in charge and dictates the engagement.
Clark: Okay. So when we zoom out a little bit and we kind of create this two different buckets with challenges that advisers have and then the challenges people looking for retirement help, people looking for assistance. What would be like maybe just two or three bullet points? We had a bullet way down like just top of mindset of what those are.
Roger: Okay. Well, for investors, one of the big concerns if you\’re a middle income or lower income investor, in other words, you\’re starting out, you\’re just trying to put some money away, send it forward, build some capital, the liability is gonna be so high. It\’s gonna be very difficult to find advice from anybody, anybody to discuss how do I get money out of here? What\’s the best strategy? What kind of investments are appropriate for me?
In fact, many brokerage firms have already eliminated advice on IRAs and the like. They\’ve jettisoned that business altogether because the liability is potentially very, very great. Again, the vagueness of the standards that have not been written yet have caused many people to give pause. It\’s considered that Robo-advisors…and I don\’t know if you know what that is, but there\’s…
Clark: Yeah, how do you define a Robo-advisor?
Roger: Well, Robo-advisors are investment platforms that are run by computers. So you essentially go to a website, you register, you answer series of questions about mostly risk, and they make investment recommendations in portfolios that are managed by computer algorithms. So they really are Robo-advisors. There\’s not a human interaction in that decision making process.
These forks are likely to flourish actually under this model, whether that is good or bad, only time will tell. This is a relatively new phenomenon. Robo-advisors have only been around for three, four, to five years. And we\’re still working out some of the kinks and seeing how that works out for the investing public. I think there\’s some potential there, certainly.
But otherwise, you\’re gonna be on your own, you know, going to places like Fidelity or Vanguard making these decisions on your own, or paying somebody like me. And that\’s where it really is gonna break down for that new investor or somebody that doesn\’t necessarily have hundreds of thousands or millions of dollars in one of these accounts. They\’re gonna have to pay me by the hour, and that\’s gonna keep a lot of people away from working with somebody like me and getting advice.
So they\’re kind of gonna be running around in the dark. And from talking with thousands of people over my career, a lot of people are just plain intimidated and overwhelmed by this decision making process and understanding what they\’re investing in. So this is my great concern is cutting off a large chunk of our population from really the financial education and support that they need to be successful.
Clark: In previous podcasts, we\’ve talked about how important it is to remove emotion, right? Remove emotion from making decisions. And I\’m assuming about Robo-advisor, I mean, there\’s obviously no emotion there, so that\’s probably a good thing. But I\’m curious, so, well, what do you think are some of the potential challenges based on the people you\’ve talked over your entire career, or you just mentioned thousands of people, what do you think would be a downfall, even though they don\’t have emotion and that\’s a good thing, what do you think is a bad thing with that style or that tool of the Robo-advisor?
Roger: Well, one of the things I worry about and there\’s been a lot of studies that show that people who work with advisors tend to not be as emotional in making financial decisions. And so if I\’m working with a Robo-advisor and we start to see a crash like 2008, you know, is somebody gonna jump out and never get back in? Are they gonna say, \”Oh, I can\’t put money towards my retirement. I\’m just gonna lose it anyways\”? I\’ve heard a lot of that in the early 2000s and again in \’08, \’09. \”What the heck? I don\’t wanna save it and then just lose it in the market. I might as well just have a good time now and worry about it later.\” So I think there could be a reduction in participation in savings programs. That\’s probably my single biggest concern.
Now one thing I\’ve learned about people is people don\’t like to be wrong. Even though being wrong gets you to the best right answer eventually and the most successful people got no or failed more often than others, people just don\’t like to be wrong. I\’ve had people come in here that were referred to me six or seven years before they actually showed up, because they were embarrassed about what they were doing. They didn\’t think they were doing as well as they should be, or they didn\’t think that they were in the right investments. And they didn\’t want somebody to tell them they were wrong.
So they just didn\’t come and seek advice just because of the ego, even though they felt a little bit overwhelmed or a lot overwhelmed in a couple of cases that come to mind, and they knew they weren\’t on sustainable courses. They were just afraid to find out what they were doing wrong. And I\’m just afraid that we get another downtown because you know they\’re coming. It\’s like buses, they just come periodically. Okay?
So you have to expect that they\’re coming, but the question becomes, \”When and how do I deal with it?\” So if I have a bad experience with one and I say, \”Gee, I\’m never going through that again,\” then, you know, you could end up frozen and not saving anything at all and find out you\’re getting into your 60s and 70s and I can\’t work anymore and I don\’t have any money, and suddenly the social safety net is expanded dramatically. And that\’s a potential unintended consequence. I don\’t know that\’s for sure that\’s gonna happen, but that\’s probably the single biggest worry that I have is folks that are doing it on their own.
You know, Suze Orman has always said, \”You can do it on your own. You don\’t need any help.\” And I talked to a lot of those people and they either put their money in stuff and close their eyes and cross their fingers and hope it goes up and find out years later it didn\’t, or they just don\’t do anything. They\’re frozen like a dear in the headlights.
Clark: Right. So they don\’t have like an empathetic insight maybe or they don\’t have like the human to human insight that you can\’t replicate. Because you can meet someone where they\’re at. Maybe they have been embarrassed, maybe they\’ve felt the what if\’s too long, and they\’ve just been frozen in their tracks. It takes another human to reach out and say, \”Hey, we can do this, or let\’s take a look at things.\” That seems to be much more empathetic than just, I don\’t know, an algorithm.
Roger: There\’s a big difference between money helping you sleep better at night or keeping you up and awake. And if you\’re not confident in what you\’re doing with it, it\’s gonna keep you awake. It\’s gonna become a source of stress instead of a source of comfort. And really a Robo-advisor can\’t talk you through those things. Then it gets back to that, \”I\’m doing what somebody told me I should be doing instead of what\’s comfortable to me.\” There\’s a lot of approaches. There\’s a lot of different ways to get from point A to point B. To get from I\’m working to I\’m happily retired. And figuring out the correct approach for you, your psychology, your lifestyle.
You know, I had a couple in here yesterday. I hadn\’t see them since November because they\’re just that busy. And so we did a little bit of work for them in November. We did some investing because that\’s what they asked for, but they know they want and need comprehensive financial planning. They\’re paying too much in taxes. Their risk management is all out of whack. And they\’re just super, super busy. But they were stressed out when they came to me that they weren\’t gonna be able to retire.
Now we have a path and they\’re so busy that we\’ve selected tools that they can just look at once or twice a year that don\’t need constant monitoring and attention, or even semi-constant monitoring and attention, because, frankly, they\’re just too busy. They don\’t have the time. So Robo-advisors will advise you within the parameters of their programming. But they can\’t make those adjustments based on those kinds of psychological inputs. I can\’t imagine some way, I suppose maybe eventually, artificial intelligence can be adapted, but we\’re probably quite a ways from being that adaptive to figuring out that stuff.
Clark: All right. Definitely.
Roger: And so these folks, you know, we went over again what we did back in December and they said, \”Well, what other alternatives?\” We went over a few of those. And they said, \”No, that\’s just gonna take too much of our time.\” So we\’re really happy with this approach. It\’s not an approach that would have ever, ever come up with the Robo-advisor. I can guarantee that.
Clark: Right. Well, I think that\’s a great way to use a topic to kind of talk about how there have been changes and Robo-advisors being some thing that, you said, just a couple of years and still gonna take very long time for it to be really be at all comparable. But for where things are right now, probably there\’s a little bit of a connection to the recent news that we\’ve been talking about with the fiduciary standards changing or potentially changing and what that means for advisors and investors. So right now, I know you said this earlier, but I\’m just trying to really wrap my head around it. So it\’s moving away from the opportunity for it to be fee-based.
Roger: No, no.
Clark: Right?
Roger: No.
Clark: Oh, it\’s only going that… Can you clear that up for me a little bit?
Roger: Yes, sure. It\’s gonna be where it\’s all fee-based. A lot of financial products historically have been commission-based and…
Clark: Maybe that\’s what I was thinking of.
Roger: So, you know, you buy a mutual fund and the advisor earns a commission. You buy an annuity, the advisor earns a commission. You trade a stock. There\’s a trading fee. Sometimes, you know, there\’s a flat fee based on the percentage of the assets under management. AUM is what it\’s referred to in the industry. And that\’s become more and more, the more common model, but there are still products that advisors earn commissions on.
And so under this new standard, there\’s going to be more disclosure about commissions, costs, fees, etc., which is I have no issue with that. You know, I\’ve been lobbying to restructure commissions in certain lines of financial products for many, many years, but laughed down at a lot of conferences. And I\’m hoping that we see some restructuring. I think it will be good for the client ultimately if we see some restructuring there.
But initially, it\’s gonna change the focus from the customer to the advisor I think. It\’s certainly gonna slow down processes because there\’s gonna be extra layers of paperwork. There\’s already a lot of paperwork compared to what is was 20 or 30 years ago, and now there\’s gonna be even more paperwork that has to be done. Some transactions will take a little longer.
That\’s not a huge consequence.
What I worry about is the vagueness of the implementation of this rule and I\’m gonna be very hesitant to work with just anybody on their retirement and considering our entire practice is based on helping people successfully make that transition to retirement. It\’s gonna be an interesting next few months, maybe even the next couple of years while this all sort itself out.
As one of my mentors said a couple of weeks back, \”If you\’re already doing things the right way and documenting everything and operating as a fiduciary and getting to know your client and all of those goods things, you shouldn\’t have a problem.\” So I\’m not too worried in that way, but a big chunk of this rule was written by the plaintiff\’s bar in such a way that I think it opens advisors up to tremendous amount of future potential liability. And I think there will be some frivolous lawsuits hiding behind this rule. And that\’s the other big worry because that will add a ton of cost and make certain products frankly unattainable for the investing public.
Clark: I know we\’ve also talked about, in the past, there\’s no single product that is the match for everyone. That\’s all about options to sort of navigate all that to find the best option on your path to retirement. But when you kind of boil all this down in all of this change and some of the worry that it creates with the vagueness and kind of the uncertainty, what do you think it\’s safe to be optimistic about right now?
Maybe this is to the people that you\’re advising, your clients or maybe this is to people who are kind of on that fence right now, maybe it\’s the person you said earlier. Maybe they\’re kind of like coming out of something or maybe they\’re just kind of afraid. It is such intimidating stuff and it can feel very exclusionary and just flat-out intimidating. But what would you say is something that we can look forward to despite there being some changes in how that looks like it\’s all going fee-based versus the commission-based?
Roger: Well, first, I think it\’s an encouraging direction in terms of consumers. I will encourage all listeners to monitor how this evolves and keep in communication with your elected representatives to make sure that as the rules are fleshed out and the guidelines are published, that we keep it consumer friendly as opposed to attorney friendly. I think it\’s gonna take a lot of vigilance on the part of the investing public to make sure that their needs and their interests are being kept in line. It\’s not just the brokerage firms and the legal establishment enjoying the benefits of this. It\’s really supposed to be for the consumer. And I\’m afraid right now it\’s not as consumer friendly as it certainly could be.
But coming out of it, if we stay and keep an eye on the right outcome, removing some of the conflicts of interest, and I wanna comment on conflicts of interest in just a moment, but, you know, I\’m optimistic that ultimately, we can get this thing right. I think a fiduciary standard is a good thing. I just think it needs to be clarified, distilled in a little simpler in wording, complexity tends to lead to lawsuits. And, you know, I want people to get good solid advice that is tailored to their specific situation. So, on the other side of that, what\’s an optimistic thing? I think there\’ll be more fee-based advisors to choose from ultimately. Although we\’ve already seen a significant exodus from the industry.
I was reading this morning that there are 22% fewer independent broker dealers than they were three years ago. And, you know, anytime we see consolidation to the bigger and bigger companies, usually it means that there\’ll be fewer choices in the future and cost will increase because of a lack of competition. So because the cost of compliance is high, there might be fewer choices, but the optimism is that it comes from the ability of the rules as they\’re being written to make it better for the consumer. I can only hope.
Clark: Right. Well, you said conflict of interest. You wanna touch on that before we…
Roger: Yeah. Thank you for that, Clark. I don\’t think there is a profession on the planet that is not loaded with conflicts of interest. I think the medical profession is rife with conflicts of interest. The banking industry rife with conflicts of interest.
Certainly our elected officials, Congress, State Assembly, local governments, they\’re just full of conflicts of interest. And even school teachers and contractors are loaded with conflicts of interest. And we can delve into that topic in the future. But anytime you earn money, you know, like [inaudible 00:26:15] said, \”You have to take care of yourself first.\” So whether it\’s enlighten self-interest or whatever, you know, the best teachers still have to retain their jobs to be great teachers.
So we have tenure. Is tenure in the best interest of students? I just don\’t know. Should doctors be able to own laboratories and then order lab tests that they\’re gonna make money on? You know, hard to say if there\’s excess stuff going on. Realtors when they sell a property, they wanna get that property sold. Is there a conflict of interest between them getting the property sold and paid or between getting top dollar for their client, and how do you know? You know, you could over negotiate and lose the deal.
So this focus on the conflicts of interest, you know, it\’s not the only profession that has them and even this is not gonna make them go away. Another article that I read through some commentary on the Department of Labor, said that in fact some bad apples may be able to get away with even worse and more egregious violations because now the paperwork is gonna be even more complex and it\’s easy to hide stuff in there.
You know, if you bought a house anytime in the last 15 years, you sat down and looked at the stack of papers and disclosures. And I understand why they\’re all there and they meant well, but I can tell you when we closed on our house the title company representative was really upset that I wanted to read every single page of the stuff that they wanted us to sign. I\’m signing it, I\’m gonna be bound by it, I better know what\’s going on and ask questions.
I\’m afraid that there\’s gonna be some abuses that will be slid into the paperwork and people can get away with it just by saying, \”Sign here.\” In fact, I have a situation with a client right now under the suitability standard. Their mom and dad were told to just sign here and now they\’re in a really rough situation that we\’re trying to get these folks out of. So that is something definitely to keep an eye on.
But, you know, I choose to be optimistic. That\’s always my choice, if I can find a place to be optimistic. I would suggest to listeners that you might wanna sit down with a fee-based financial planner because at least my clients\’ experience, they make money on investing in the advice that I give. In other words, I consider it my responsibility to find money or improve performance or reduce taxes in a manner that exceeds what you pay me. And if you can go in and look at that as an investment that you\’re going to get a return on, maybe it will be a little easier for you to retain a fee-based financial planner to help you structure things in a way that works for you. So that would be advice I will give to our listeners.
Clark: That\’s good. Well, earlier on, we were talking a little bit how it all can feel overwhelming. It\’s easy to feel embarrassed or feel like you\’re doing the wrong thing before you go and talk to someone.
So in all of that uncertainty, there is something, I know we wanna make sure we mention this on every episode, it is the thought organizer and the thought organizer is one of the tools out of the box…easy to access that you offer, and the thought organizer is an option for someone to fill out to sort of think about where are they right now? And take an honest inventory of what their goals are and then that\’s just the first step to working with someone like you. So do you want to add anything about a thought organizer and why you built it the way you did?
Roger: Well, we built it the way we did to help people literary organize their thoughts. You know, there\’s a lot of should versus a lot of want. \”I should be investing in this type of a fund or in this type of an asset.\” I\’m gonna sit down this afternoon with a woman who filled out, the thought organizer said she is currently unwilling to accept downside risk on more than 10% of her portfolio. But she\’s full of small cap emerging market funds, junk bond funds.
She\’s got just a boatload of money invested in this high risk asset groups. And so my conversation is, she retained me as a second opinion. She\’s paying an advisory fee for her assets under management. And I\’m very curious to see what they suggested her suitability and risk tolerance were when they sat down with her originally because we have our folks fill that out without me or anybody else being around. We want to have it already filled and brought in.
So comparing that with what she\’s actually doing, the thing she\’s currently doing are not consistent with her comfort zone and with her objectives. So if you have an advisor, if you have investments somewhere, you can use that thought organizer to help you get a solid feel for how you feel about risk, what keeps you up at night, what are your priorities. And having that context the next time you go in and sit down and review that portfolio with folks at that the brokerage firm or Schwab or your advisor, the bank, or whomever you\’re working with.
This gives you that context so that you can speak confidently about yourself instead of having them tell you what you should be doing or how you should be feeling. So that\’s how I would be recommending people to use that thought organizer right out today.
Clark: That\’s great. So all that is available at gainerfinancial.com. This is usually, when we start to wrap things up, I\’ve always enjoyed our conversation and I know this is a lot of stuff and I know we could really keep talking and keeping the conversation going because this stuff is pretty complicated. But I really appreciate how you were able to break it down for me, someone like me to understand. So I\’ve enjoyed it. Do you have any final things in your heart before we wrap up?
Roger: Well, I hope I didn\’t serve to add to the confusion out there. This is one of those kind of topics where you can really find yourself in the weeds. But, you know, keep your chin up out there and if you have questions, feel free to give us a call, 415-331-9030. Happy to answer any questions about how this affects you or stuff you don\’t understand. You know, we really want to see the level of discourse and decision making increased for everybody.
Clark: Excellent. Roger, thank you so much. I am looking forward to our next Retire Happy podcast.
Roger: Beautiful. Thank so much, Clark. Talk you soon.
Clark: Thanks so much for listening to this episode of Retire Happy. Be sure to head on over to gainerfinancial.com to download your thought organizer to get started. Roger L. Gainer, CHFC, California insurance license number, 0754849, is licensed to sell insurance and annuity products in California, Illinois, Arizona, Pennsylvania, and New York.
Roger L. Gainer is an investment advisor representative providing advisory services through HFIS, Inc., a registered investment advisor. Gainer Financial & Insurance Services, Inc. is not owned or affiliated with HFIS, Inc., and operates independently. Thanks again so much, and we\’ll see you next time on Retire Happy.