September 13, 2024 • 32 mins
Ever wondered why your financial advisor recommends certain products? Join us on Bullshit on Stilts as we unravel the confusing world of financial advisors and insurance agents. We start with a deep dive into the various roles within the financial services and insurance industry, decoding titles like registered representatives, investment advisors, and wealth managers. We'll also shed light on insurance agents, contrasting the limited options of exclusive agents with the broader choices offered by independent agents. Learn about the standard of care these professionals owe their clients and why "reasonable care" often falls short of a fiduciary duty.
Next, we shift our focus to the intriguing world of investment brokers and their compensation structures. What's the real difference between commission-based and fee-based models? And how do Registered Investment Advisors (RIAs) and Independent Advisor Representatives (IARs) fit into the picture? We'll also explore the critical role of fiduciary duty, backed by regulatory oversight from authorities like the SEC. Using the infamous Bernie Madoff scandal as a cautionary tale, we highlight the pitfalls of relying solely on fiduciary status for trustworthiness and professionalism.
Finally, we demystify the alphabet soup of financial certifications and roles. From Chartered Financial Consultant (ChFC) to Certified Financial Planner (CFP), we explain what these designations mean for you. We also discuss the potential conflicts of interest that arise when professionals hold multiple licenses, such as when insurance agents double as brokers. By understanding these distinctions, you'll be better equipped to evaluate the advice you receive and ensure that your financial goals are met with integrity and professionalism. Tune in for a blend of serious analysis and lighthearted banter that aims to keep you both informed and entertained.
We love to hear your thoughts, questions, and ideas. Send us a text!
Developing your financial bullshit sniffer one episode at a time.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:01):
Welcome to Bullshit on Stilts, a podcast hosted by
two guys with vast financialbackgrounds and great bullshit
sniffers who call out the clichecrap, spackle and flap doodle
spewed by so-called expertsacross the landscape of
financial advice, identifying asdoctors of bullshitology.
You can count on your esteemedhosts okay, maybe knuckleheads
(00:24):
to bring you a lively, if notdeadly, mix of bullshitology.
You can count on your esteemedhosts okay, maybe knuckleheads
to bring you a lively, if notdeadly, mix of serious analysis,
hijinks and tomfoolery, allwithin a 99.1% bullshit-free
safe space.
Let's get after it.
Okay, welcome to Bullshit onStilts.
Today, we're going to befocusing on those professionals
(00:46):
that practice within thefinancial service and insurance
industry, and when we sayfinancial services generally, we
imply it's financial serviceand insurance itself.
So that's what we're going tobe talking about.
Mark, set us up, shut up andsit down.
Speaker 2 (01:01):
So let's define what is a financial advisor?
Really, it's a catch-all term.
It's a generic term forinsurance agent, registered
representative or broker,registered investment advisor or
an RIA, an investment advisorrep, an IAR, and for non-legal
terms, financial consultant,wealth manager and financial
(01:22):
planner.
So let's get into these.
Speaker 1 (01:25):
Absolutely, because there's lots of acronyms and we
want to enjoy those acronymsproperly.
I feel like I'm back in thearmy.
Speaker 2 (01:31):
At ease, soldier.
Well, we do.
We don't want to bring acrimonyto the acronyms.
Speaker 1 (01:45):
Oh, that's pretty good, all right.
So first up on the agenda, Ithink you spoke of insurance
agents, and when we talk aboutinsurance agent, we're talking
about a professional thatspecializes in transferring
financial risk from you to aninsurance company itself,
depending on what risk.
So talk about the insuranceagent.
Speaker 2 (01:55):
Well, they're in the business of recommending and
selling insurance andinsurance-related investment
products to their customers.
In general, there are two broadcategories of insurance agents
independent agents, whorepresent several insurance
companies, and exclusive agents,who represent only one
insurance company.
In both categories, the agentacts as a representative or
(02:17):
agent of the insurance companywhen dealing with customers.
Speaker 1 (02:21):
Yeah, and when you talk about like the exclusive
agent, I think any more.
In the industry agents thereare some like life carriers,
life insurance companies, whereyou might be an exclusive agent
but wink, wink, nudge, nudge,you can still distribute and or
sell other insurance companiespolicies to your client If it's
a better fit with the structureof insurance.
(02:42):
Today, when it comes toproperty casualty, like I don't
know, a state farm, allstate,something like that they tend to
be truly purely only thatinsurance that they can sell.
So if there's a better deal outthere less expensive, better
performance, more coverage theydon't have the option to go
ahead and share with you thosemore competitive solutions, all
(03:03):
right.
So what's the implication there?
Implication is they have a hugeconflict of interest.
There's been an alarmingincrease in the number of things
you know nothing about From astandpoint of if you come to
Burger King, you want thatsandwich.
There's a Whopper here.
Don't ask for a McDonald's,don't ask for Wendy's, don't ask
for Taco Bell.
It's only one thing.
Speaker 2 (03:22):
Here you go again with fast food.
Wendy's, don't ask for TacoBell, it's only one thing.
Here you go again with fastfood.
I know, it's just something.
Speaker 1 (03:31):
I just love that stuff.
The world, according to Kelly,within the analogies of fast
food Stay tuned, it's going toget even better.
So, when we're talkinginsurance agents, what is their
standard of care right?
What is their duty with regardsto taking care of your
interests versus their interestsversus, let's say, the company
they work for?
Speaker 2 (03:48):
All right.
Generic language on that readskind of like this An insurance
agent or producer has a duty touse reasonable care, diligence
and judgment in procuringinsurance.
Speaker 1 (04:01):
Well, that cleared that up, didn't?
It Sounded like that was offthe cuff.
So, bottom line, their standardof care is not fiduciary, no,
it's reasonable care.
Say it again.
Speaker 2 (04:14):
No, it's reasonable care.
So here's an important noteEven if you rely on an agent's
expertise, it's yourresponsibility to read through
the policy documents fordiscrepancies Interesting,
(04:34):
because at least in the state ofMichigan here, if you received
your policy it was delivered toyou and that's called
constructive receipt of yourpolicy.
It is on you to read throughthat because you have a free
look often.
Yeah.
Speaker 1 (04:42):
Usually so it's on you.
Yeah, usually so, it's on you,yeah, yeah.
So then, given this standard ofcare, that's sounds more like
suitability than it does ahigher level it is a suitability
.
Speaker 2 (04:52):
It's a suitability.
Speaker 1 (04:53):
So, within this standard of care, who's who's
looking out for Mr and MrsConsumer out there?
Who's regulated they're?
Speaker 2 (04:59):
regulated by the states in which they do business
, kelly Interesting.
So agents who sell mutual fundsare variable annuities.
In addition to the states,they're also regulated by the
Financial Industry RegulatoryAuthority, or FINRA FINRA that's
what it's called and then youhave the National Association of
Insurance Commissioners or theNAIC.
Speaker 1 (05:19):
Yeah, so basically each state insurance regulator
is a member of the NationalAssociation of Insurance
Commissioners, right, naic, andthey basically create or develop
or recommend a best practicefor insurance companies, agents
and so forth to follow and thenwithin every state, each state
can choose to adopt or not toadopt that, let's say, modeled
(05:42):
regulation or approach to doingbusiness.
Yes, okay, so when we'retalking, we're going to wrap up
this insurance agent side andagain we're talking in general,
whether it's property, casualty,health insurance, life
insurance, disability insurance,all sorts of insurances how do
they get compensated?
Speaker 2 (05:59):
It's commission-based and some insurance products
allow the agent to opt for anongoing fee.
I don't know how popular thatis anymore.
Instead of the upfrontcommission.
Speaker 1 (06:07):
Yeah, I think that ongoing fee is most popular
where you have fee-onlyfinancial professionals that
everything they do is fee-based.
Again, I don't know howprevalent that is, but I do know
fee-only advisors.
If they're not sellingfee-based insurance, they
probably aren't a fee-onlyadvisor, right?
All right, so let's move on toregistered representative,
(06:30):
otherwise known as investmentbrokers.
Give us kind of the lowdown.
And who these people are.
Speaker 2 (06:35):
I was one of those people because I came into the
industry as a registeredrepresentative for a large
brokerage investment bankinghouse.
So brokers are legally referredto as registered
representatives, meaning theyare properly licensed and
registered to buy and sellsecurities for their customers
(06:55):
through the company theyrepresent, and the company is
known as a broker-dealer.
And brokers typically earn acommission when buying and
selling securities inside theircustomers' accounts.
Now here's a distinguishingfactor Registered reps provide
non-continuous, point-in-timeinvestment recommendations
(07:16):
before a buy or a sell ortransfer within a mutual fund
family, which we discussed inour last podcast.
Before they can be transacted,the registered rep must receive
approval from the account owner.
This type of account isreferred to as a
non-discretionary account.
Speaker 1 (07:32):
So when they're incidental advice, essentially,
what do you mean by that?
Speaker 2 (07:38):
It's not ongoing and continuous, Not ongoing.
Thank you.
Speaker 1 (07:41):
Yes, the only time you get feedback from a broker
technically would be if theyreach out to you and talk to you
or you call them, in which casethey can or they will give you
feedback as a sounding board.
Maybe that's not the best thing,mark.
Maybe what we should do is doit this way.
That's sort of thatrelationship with the broker.
Yeah, usually.
(08:01):
Going back to our last episode,when we were talking about what
are your total costs?
Right, there's the fifth numberon the Fab Five on investing.
Right, we talked about A, b, cshare mutual funds.
Speaker 2 (08:13):
No, Kelly, you did.
Yeah, I did talk about that,didn't I?
Speaker 1 (08:17):
That was pretty good man actually.
Speaker 2 (08:18):
Thank God there aren't X, y and Z funds.
Speaker 1 (08:24):
I don't know what you're talking about.
I'm going to start a filibusternow with A share, C share Okay.
So the people that we'rereferring to when we're talking
about A, b, c share mutual fundsare brokers.
Yes, okay, and so a brokernowadays could actually pretend
or, let's say, earn money, sortof like the next two you're
(08:45):
going to talk about theregistered investment advisor,
investment advisor rep, becauseif I sell you a C-share and I'm
getting a 1% commission everyyear that you're invested in
that C-share, doesn't it look,smell and taste just like a 1%
fee from an advisor, with theexception of advisor will give
me ongoing supervision, advice,monitoring and so forth.
Speaker 2 (09:04):
Yes, in fact, it's not even a fairness issue.
It is the way it is.
Speaker 1 (09:09):
It's how the industry has evolved, right yeah, fair
or unfair, that's just the wayit is Right right.
So a broker can work withsomeone and a broker could be an
insurance agent with a broker'slicense and can work with
someone and sell them loadedmutual funds for their
retirement accounts, lifeinsurance policies for their
life insurance needs and or cashvalue life insurance as a way
(09:30):
to accumulate cash value in alife policy over time.
Speaker 2 (09:34):
Sure, okay, typically the products and the
investments that they offerwe've talked about, yeah,
individual stocks and bonds,mutual funds, exchange traded
funds, options, ipos which areinitial public offerings
annuities and otherinsurance-related products, if
they're licensed to sellinsurance.
Speaker 1 (09:53):
Okay, got it this guy was good.
All right.
So when we're talking aboutregistered reps, brokers, what's
their standard of care?
What are they responsible orhave to make sure they do on
behalf of their clients?
Speaker 2 (10:06):
An insurance agent or producer has a duty to use
reasonable care, diligence andjudgment in procuring insurance
With registered reps.
It is suitability, let thegames begin.
So under the suitabilitystandard of care, the registered
rep or the broker has aregulatory obligation to have a
(10:29):
reasonable basis for believingthe strategy or the transaction
is suitable for their client'sneeds, financial situation and
risk tolerance, investmentexperience, etc.
Interesting.
Speaker 1 (10:41):
Let's talk about the first investment I made.
In a world fraught withconfusion, one man will break
his silence.
Speaker 2 (10:50):
As a young lieutenant in the army and you still
haven't gotten over that.
I remembered.
Speaker 1 (10:55):
So when I went in to see an advisor that specialized
in working with military, heasked me what I wanted to do and
I said I'd like to grow mymoney.
So of course that gave him thesuitability definition that he
was looking for growthinvestment.
Okay, I'm young, I can take ongrowth volatility, and what he
(11:16):
was responsible to do is find agrowth-oriented investment.
In this case it was mutual fundand I believe it was the Janus
Growth Fund and this was back in1992.
And of course, growth was on atear for the next decade.
Speaker 2 (11:31):
And Janus was, I think, about 60% of the dollars
were going into Janus Absolutely.
Speaker 1 (11:36):
So, based on the idea of growth, it was perfectly
acceptable for him to recommendJanus Growth and I think he
recommended a couple.
There might have been a valueoption there, but my brain's
like I don't care about value, Iwant my stuff to grow, so let's
do the Janus Growth.
That's how I ultimately madethe decision and he didn't
(11:59):
suggest one way or the other.
Obviously he was going to getpaid either way and these were
A-share mutual funds.
So the first year of my lifeinvesting about 5% of what I had
.
Back then it was more, but 5%of what I invested went right
into his pocket.
I saw the deductions in myinvestment amounts, my principal
being invested monthly andthat's what he earned.
(12:22):
And of course, I ultimately Ithink they hit a skid in a
couple of years.
It might've been 94.
And I think I pulled out of itlike a knucklehead and so forth.
But just to give the sense, theadvisor, the broker they don't
really have a duty to give methe best growth fund in my
example, in my story, with thelowest costs, with the best
(12:46):
volatilities and all these otherthings.
They just got to meet me withthe overall, let's say,
definition of the investment.
This is a growth fund.
He wants growth matched.
Speaker 2 (12:57):
Right.
So suitability does not protectyou from unreasonable or
nefarious business practices?
Perfect, it doesn't.
So we go back to the character.
Yeah, you got it dude.
So I've known brokers thatoperated more as a fiduciary
just by their inherent characterthan fiduciaries masquerading
(13:19):
as a fiduciary with a brokermindset.
Speaker 1 (13:21):
Interesting, or at least less than honest, mindset
we're doing a podcast.
Speaker 2 (13:27):
So if we don't have incendiary claims in here that
are over the top.
Nobody's going to listen.
I forgot the tarn feathersbrother, you suck Okay.
Speaker 1 (13:36):
So then let's talk about who is looking out for the
consumer.
When we're talking aboutinvestment, bro, who's doing the
job?
Speaker 2 (13:43):
Well, we can talk about who's out there and then
we can follow up with that witha shorter list of who's really
doing the job.
Speaker 1 (13:49):
Yeah, let's talk about who's doing the job of
taking care and protectingconsumers.
Speaker 2 (13:53):
Well, they're regulated by the state
securities regulators in eachstate in which they do business,
and they're also regulated byFINRA, the Financial Industry
Regulatory Authority, and alsothe Securities and Exchange
Commission, or SEC.
Speaker 1 (14:08):
Most brokerage houses .
I think every one of them,every investment advisor, every
insurance agency has someone,maybe two or three people that
their job is to be the extensionof the regulators by ensuring
that clean business is beingdone, known as compliance.
Yes, those are the ones thatare in the trench lines up front
(14:29):
with all the agents, advisors,brokers, and they're the ones
that are responsible, sort of,to make sure that business is
being done proper, clean andeffective business.
Speaker 2 (14:39):
Right, and that's why the industry is a lot cleaner
in terms of good business, badbusiness, and clean business
meaning good business, right andthat's why the industry is a
lot cleaner in terms of goodbusiness, bad business and clean
business, meaning good businessis because of internal
compliance.
Speaker 1 (14:53):
So, lastly, how are these investment brokers
compensated?
How do they make money?
Speaker 2 (14:58):
Commissions off of the products that we had
mentioned mutual funds,individual stocks bonds,
exchange-traded funds,individual stocks bonds,
exchange-traded funds and I'msaying commissions generically.
Speaker 1 (15:07):
So, just like the insurance agent, they earn
commissions.
Yes, Different products albeit,but their structure of earning
money is through a commissionand typically those are upfront
paid within the next 30 days ofthe sale of whatever product
we're referring to.
And that's a commission.
They're not going to get paid aheck of a lot of money next
(15:28):
year or the following year and Ithink we've covered that in
C-shares maybe a little bit Hell.
Yeah, that's what I'm talkingabout and I know, in life
insurance there's a little bit,but nothing significant.
Speaker 2 (15:42):
It's a commission that is paid and the standard of
care, the scope and intent orintention of the standard of
care, is the same.
The wording is just different.
Speaker 1 (15:53):
Okay, so let's get into the next.
Really two, right?
The registered investmentadvisor, known as an RIA, and
the independent advisorrepresentative, known as an RIA,
and the independent advisorrepresentative, known as an IAR.
Help us pull this apart realquick, mark.
Speaker 2 (16:09):
All right.
An RIA registered investmentadvisor can be a standalone
operation, its own entity, or itcould be a separate entity,
subsumed within but separatefrom a large broker, dealer or
bank.
The IAR is the individual whooperates within that RIA,
(16:30):
offering ongoing and continuousfee-based advice.
Are you lost yet?
Are you lost?
Speaker 1 (16:38):
yet Right.
So I could work for Bank ofAmerica, bank of America owning
a registered investment advisor.
I could be licensed as theemployee working there as an
independent advisorrepresentative.
I might just for short say I'man investment advisor, I'm an
advisor, but technically thatgives me the authority now to
(17:01):
charge what for my servicesOngoing fees, ongoing fees, so
it's a fee-based account.
Speaker 2 (17:07):
Yes, and you can also be registered within Bank of
America as a broker registeredrepresentative receiving
commissions, yeah, so this getsreal confusing, right?
Speaker 1 (17:18):
It does Now riddle me this Batman.
Could I also have insurancelicenses and then recommend
insurance to clients, eventhough they're at Bank of
America?
And geez, I didn't know, youguys did life insurance too.
Well, I like you so much andthe Coca-Cola was tasty.
Yeah, let's do that as well.
All right, so with regards toregistered investment advisor
(17:39):
and their IARs, what is theirstandard of care?
Speaker 2 (17:42):
What do they get held to in terms of responsibility
to their clients, doing what'sright for them and putting their
interest first, just like thebroker should be doing under
suitability.
We all know what doing what'sright is about.
I don't need to use terms likesuitability or the one I'm going
to use right now.
Terms like suitability or theone I'm going to use right now,
(18:05):
fiduciary, don't, don't don't.
We love that term.
Our industry does well.
You know, I'm operating as afiduciary, which means I am
compelled nobody says I want to,but I am compelled to operate
and make all of my judgments anddecisions and transactions
solely in the better interest ofyou, my client.
See it says so right here inthe contract.
Speaker 1 (18:27):
That is the correct answer.
Isn't it interesting thatfiduciary is now part of sales
and marketing pitches from folksin the business?
If you're not working with afiduciary advisor, you should be
.
I'm a fiduciary advisor, and ifyou're not working with one,
maybe you give us a call.
I mean on and on and on.
It's now a marketing term morethan it is a technical term when
(18:50):
it comes to legalresponsibility to your clientele
.
Speaker 2 (18:53):
I think it's watering down the higher order, the
higher calling of people to getinto the industry that really
want to help people, becausethat's a character issue.
Yeah, it is.
Speaker 1 (19:05):
It's story time as a reminder and I know we went
through this but Bernie Madoffhe owned a registered investment
advisor.
He was an investment advisorrepresentative and yet we all
know the story of Bernie Madoffembezzled billions from his
clientele, so he was a fiduciary.
So if you think about that, doall fiduciaries immediately have
(19:27):
our trusts?
I don't think so.
Just because you're a fiduciarydoesn't mean you're beyond
reproach.
Speaker 2 (19:37):
Correct.
There is a higher oversight andthe bar is set quite high as
opposed to suitability.
That doesn't mean you're reallyworking with a fiduciary,
because I believe part of beinga professional is a couple of
components here.
You have an esoteric body ofknowledge, you have also a
(19:59):
calling and you operate at alevel of professionalism that
inherent in that calling is Iput my clients first and I don't
have to wave a banner tellingyou that's what I do.
Yeah, when I hear trust me, I'ma fiduciary, I scream jump, run
the other way.
Speaker 1 (20:15):
You do that a lot, though I mean even when I say
boo when you come out of thebathroom as soon as this podcast
is over.
Speaker 2 (20:19):
Mark Robinson has left the room.
I danger when this podcast isover.
Mark Robinson has left the room.
Speaker 1 (20:24):
My danger will so help me a little bit more.
The RIA and the IndependentAdvisor, rep IAR, who is
basically making sure andsetting the rules for the
advisor, the investment advisor,investment advisor
representative, when it comes tothe business that they do,
depending on the size of theassets.
Speaker 2 (20:44):
It could be the state and that's under $100 million
Above.
That is the Securities andExchange Commission, sec.
Right, so SEC is the godfather,so to speak, when it comes to
looking out for consumers,practices, businesses for
registered investment advisorsyes, yes, and it has an
illustrious career, even rightback to its founding, of always
(21:06):
setting aside politics, alwayssetting aside special interest,
to work solely on the managementand flow of business to the
better interests of the clients.
And who better could they putin to first be the head of the
SEC, but that whiskey runner,joseph Kennedy?
You mean the first head of theSEC back?
But that whiskey runner, josephKennedy.
Speaker 1 (21:24):
You mean the first head of the SEC?
That's right.
That's right.
Back in 35, 36, whatever it was, yeah, yeah, and he was going
to clean things up.
Speaker 2 (21:30):
Do you know why I bring that up?
Because you're angry, Forgiveme.
Speaker 1 (21:33):
Father, for I have sinned.
Speaker 2 (21:36):
Yeah, it's total bullshit on stilts, regulatory
authorities, and there seems tobe this moral vector that,
because you work for FINRA or astate regulator or the SEC, that
you are acting as a fiduciaryand you have that calling of
truly looking out for the betterinterest of the consumer, that
(21:56):
hapless consumer that alwaysgets the rubber chicken over the
head.
Speaker 1 (22:00):
That's right.
Well, we know, by virtue ofEnron trading.
It's the rubber chicken overthe head.
That's right.
Well, we know, by virtue ofEnron trading fiasco.
Regulators are like any otherjob out there.
Some of them do their job well,others don't, and when they
don't, a lot of bad thingshappen.
We can look at Bernie Madoff.
A lot of bad things havehappened because regulators
didn't do the regulatory jobthat they're required to.
And guess what?
(22:27):
In the future there are goingto be regulatory events that
regulators didn't do their jobin, and there's going to be more
bad stuff that happens in thefuture.
It's this continuous wheel oftime and we rhyme.
We might not exactly repeat,but damn, that stuff rhymes all
the time.
So we get back to this.
How do we help you develop yourbullshit sniffer?
One part is upping your gameand knowing a little bit more
than what you know now, so thatwhen you're involved with
looking and working on yourpersonal finances and having
(22:48):
professionals in your lifehelping you, good on you, great
job.
Just remember Ronald Reagan'sfamous lines trust but verify,
don't trust blindly.
Have the mechanism to verify.
Speaker 2 (23:01):
Yeah, and trust has a rapid rate of obsolescence.
By the way, it has to beconstantly re-verified.
Say that again, though thatsounded great Trust has a rapid
rate of obsolescence.
Say it again.
Speaker 1 (23:15):
Are there certain types of professional
designations that thesefinancial professionals bring to
the table that help you todetermine whether they bring
strong game knowledge,experience or not?
What kind of designations mightthese sorts bring?
Speaker 2 (23:28):
Well, there's all sorts of designations and they
became very popular in the 1990sand some of them were, you know
, three-hour courses and youcould have letters after your
name.
We are so desperate for that inour industry.
We're just salespeople, most ofus, and when we plumb the
(23:49):
depths of our true selves weknow I'm just a salesperson but
I love to hold myself out ashaving special knowledge, as a
witch doctor or high priest thatonly I have access to and you
need to obey and follow.
So we get crazy assdesignations, most of which
really aren't anything, that aremeaningful, but then others are
(24:11):
where there is certification orthird party certification or
are recognized by FINRA.
Speaker 1 (24:17):
Now in life insurance there's a thing called a
chartered financial consultant.
Yes, and that's sort of that,granddaddy.
So is a certified lifeunderwriter.
Clu CLU right Big deals bigdesignations in the insurance
world, in the investment land.
You have the CFP certifiedfinancial planner.
You have the CFA certifiedfinancial analyst yes, which is
(24:38):
also a big daddy.
It takes about three years ofstraight study and test passing
to get your level and that'sprimarily at the corporate level
or at the institutional level.
Having a cfa, they rarely are inpractice small, small
institutional and retail Iusually in my past have run into
cfAs outside of the largeinstitutions in spinoffs where
(25:01):
they've started their ownorganization.
They're a trader, they're ahedge fund manager, they're
something of that nature wherethey really need and desired a
hugely brawn in terms ofanalytic knowledge, skill
certification and so forth.
And portfolio management andportfolio management.
Yeah, so interesting.
With regards to brokers, whatcertifications do?
Speaker 2 (25:23):
brokers.
You know a straight old linebroker really didn't need
certification.
They're savvy and insight wasinto the market, market
directions, individual securityanalysis, technical analysis
also and recommending stocks,bonds to buy and mutual funds
Cool.
Speaker 1 (25:41):
So when the market comes at the consumer with
insurance agent, investmentbroker, investment advisor,
representative all of which sortof refer to themselves as
advisor, is there a differencebetween registered investment
advisor versus I'm a financialadvisor?
Speaker 2 (26:00):
The industry made sure that it acknowledged the
difference, but not in a waythat the consumer could really
apprehend the difference.
Epic fail.
So we had investment advisor.
Remember, we talked about theInvestment Advisor Act.
That's spelled with an E.
Speaker 1 (26:18):
So the advisor that relates to the registered
investment advisor, thefiduciary standard of care is
spelled with an E.
Speaker 2 (26:26):
V-E-R.
Speaker 1 (26:28):
A-D-V-I-S-E-O-R.
We could have done a SesameStreet thing right there.
It would have been phenomenal.
Anyway, go on.
You've already ruined themoment.
Speaker 2 (26:37):
Well, we should really do a Count Dracula with
you with all your numbers.
Oh, I like that, you know, Ilike my calculator.
All right, I digress, all right.
So we've talked about theadvisor with the E, so the
industry came up with advisorwith an O.
Oh really, oh really, you're anadvisor.
Speaker 1 (26:55):
I didn't see that coming.
Speaker 2 (26:57):
Interesting.
So that's why we have financialadvisors.
Oh, I had no idea.
That's why it's a non-legalterm also.
Speaker 1 (27:05):
So if I see someone with a business card and the
business card says I don't knowfinancial advisor with an O on
the business card, that's sortof a tell, isn't it?
If I'm playing poker with theperson, that's a little bit of a
tell, isn't it?
If I'm playing poker with theperson, that's a little bit of a
tell.
Are they really working with aregistered investment advisor or
is it just a generic term theydecided to put on their card to
(27:25):
explain their role, theirresponsibility, their position
in an organization.
Speaker 2 (27:30):
It's a generic term financial advisor.
Instead of putting remember onthe cards, it used to say
registered representative.
Speaker 1 (27:37):
I mean, it still does , it still does, I does.
I think you have optionsregistered food allergies yeah,
so long.
Speaker 2 (27:42):
Yeah, so you have the registered representative and
then talking about your positionin the company.
Usually that is by investmentof investment executive.
Take two um, how did you?
How did it happen?
That's awful.
So investment executive.
Take two, that's all folks.
So investment executive, vicepresident, senior vice president
(28:05):
, which has nothing to do withtheir acumen, it's just that
they are good producers, yep,and so they matriculate up
through these terms Interesting.
Speaker 1 (28:14):
Yeah, interesting.
Speaker 2 (28:15):
We've talked about insurance agents, brokers,
registered representatives, andwe've talked about investment
advisor representatives, IARswho charge a fee within the RIA.
I'm talking to one of thosethat has the hat trick as you
call it.
Speaker 1 (28:31):
They're licensed in all three.
Speaker 2 (28:33):
Yeah, what is inherent and problematic in
dealing with someone, at leastinitially, with someone that has
the hat trick, so to speak?
Speaker 1 (28:42):
Well, I think there's two sides of this coin If
you're working with someone witha hat trick, and they are.
This has three parts.
Speaker 2 (28:48):
So do you really want to use the two sides of the
coin?
Speaker 1 (28:50):
Yeah, because we're talking about one that operates
with character and one thatoperates without character.
So I think, if you're working,with someone you didn't want.
Speaker 2 (28:58):
To have fun with me on that, I didn't want to.
Speaker 1 (29:00):
No, leave me alone.
Stop touching me, Okay.
So if you have the hat trickand you're working with someone
with high character, we refer tothem generally as a
strong-handed advisor.
They have insurance licenses,they're a broker, licensed as a
broker, and they're alsolicensed to be an solutions to
(29:40):
solve for your planning needs.
Always, same company that haslife insurance is an investment
broker and an investment IAR,but doesn't necessarily operate
with the strongest character.
There you may, and most likelywill, encounter someone that's
acting on that conflict ofinterest, recommending solutions
(30:01):
and products that may benefitthem more than they benefit you,
and they might not be lookingout for your best interest,
while all the while making senseto you, the consumer, as to why
they're recommending X, B, Yand M as an example.
Speaker 2 (30:16):
You have yet to learn your alphabet in the sequence
that was Cyrillic.
Speaker 1 (30:19):
Yeah, that was a Cyrillic alphabet.
Yeah, so M's are H's and K'sare K.
Speaker 2 (30:24):
And then there's some crazy stuff just isn't in the
English alphabet Indeed, indeed.
So, kelly, what are thetakeaways from today?
Wrap this up.
Speaker 1 (30:32):
So the who's, who and what do they do?
Wrapping it up, the idea is tohelp you understand that there
are, broadly speaking, threedifferent professionals that you
will customarily meet whenyou're working on financial
planning, financial objectivesand so forth.
Each of these professionals,whether they're an insurance
(30:52):
agent or investment broker or aninvestment advisor
representative, are required andare monitored by different in
some cases similar agencies,regulatory agencies out there,
and that, depending on how theywant to solve or recommend to
solve for your planning needs.
Every insurance agent out theretypically has a bias to
(31:14):
insurance to solve your problems, so there's always an insurance
product to solve your problems.
If you're a broker, well, everybroker out there learns how to
solve your problems withinvestments that pay commissions
or spreads and markupsmarkdowns, depending on what
they're working with you on.
If they're an investmentadvisor rep, they're earning fee
(31:34):
income and they're held to thehighest standard of stewardship,
that being fiduciary, at leastfrom the regulatory standpoint.
So hopefully, if you work withprofessionals, if you interview
professionals down the road, youcan use some of this knowledge
to start discerning what thatprofessional truly is, what
(31:55):
standards they're held to andhow they're going to get paid if
you end up working with themgoing forward.
How was that?
Speaker 2 (32:01):
That's good.
Speaker 1 (32:02):
Pat me on the back buddy.
Pat me on the back.
Speaker 2 (32:05):
Come on, scratch my ear, scratch my ear.
You know I've been under thetable here.
I thought I was petting the dog, but it's your shin, it's a.
Welcome to Bullshit on Stilts, a podcast hosted by
two guys with vast financialbackgrounds and great bullshit
sniffers who call out the clichecrap, spackle and flap doodle
spewed by so-called expertsacross the landscape of
financial advice, identifying asdoctors of bullshitology.
You can count on your esteemedhosts okay, maybe knuckleheads
(00:24):
to bring you a lively, if notdeadly, mix of bullshitology.
You can count on your esteemedhosts okay, maybe knuckleheads
to bring you a lively, if notdeadly, mix of serious analysis,
hijinks and tomfoolery, allwithin a 99.1% bullshit-free
safe space.
Let's get after it.
Okay, welcome to Bullshit onStilts.
Today, we're going to befocusing on those professionals
(00:46):
that practice within thefinancial service and insurance
industry, and when we sayfinancial services generally, we
imply it's financial serviceand insurance itself.
So that's what we're going tobe talking about.
Mark, set us up, shut up andsit down.
Speaker 2 (01:01):
So let's define what is a financial advisor?
Really, it's a catch-all term.
It's a generic term forinsurance agent, registered
representative or broker,registered investment advisor or
an RIA, an investment advisorrep, an IAR, and for non-legal
terms, financial consultant,wealth manager and financial
(01:22):
planner.
So let's get into these.
Speaker 1 (01:25):
Absolutely, because there's lots of acronyms and we
want to enjoy those acronymsproperly.
I feel like I'm back in thearmy.
Speaker 2 (01:31):
At ease, soldier.
Well, we do.
We don't want to bring acrimonyto the acronyms.
Speaker 1 (01:45):
Oh, that's pretty good, all right.
So first up on the agenda, Ithink you spoke of insurance
agents, and when we talk aboutinsurance agent, we're talking
about a professional thatspecializes in transferring
financial risk from you to aninsurance company itself,
depending on what risk.
So talk about the insuranceagent.
Speaker 2 (01:55):
Well, they're in the business of recommending and
selling insurance andinsurance-related investment
products to their customers.
In general, there are two broadcategories of insurance agents
independent agents, whorepresent several insurance
companies, and exclusive agents,who represent only one
insurance company.
In both categories, the agentacts as a representative or
(02:17):
agent of the insurance companywhen dealing with customers.
Speaker 1 (02:21):
Yeah, and when you talk about like the exclusive
agent, I think any more.
In the industry agents thereare some like life carriers,
life insurance companies, whereyou might be an exclusive agent
but wink, wink, nudge, nudge,you can still distribute and or
sell other insurance companiespolicies to your client If it's
a better fit with the structureof insurance.
(02:42):
Today, when it comes toproperty casualty, like I don't
know, a state farm, allstate,something like that they tend to
be truly purely only thatinsurance that they can sell.
So if there's a better deal outthere less expensive, better
performance, more coverage theydon't have the option to go
ahead and share with you thosemore competitive solutions, all
(03:03):
right.
So what's the implication there?
Implication is they have a hugeconflict of interest.
There's been an alarmingincrease in the number of things
you know nothing about From astandpoint of if you come to
Burger King, you want thatsandwich.
There's a Whopper here.
Don't ask for a McDonald's,don't ask for Wendy's, don't ask
for Taco Bell.
It's only one thing.
Speaker 2 (03:22):
Here you go again with fast food.
Wendy's, don't ask for TacoBell, it's only one thing.
Here you go again with fastfood.
I know, it's just something.
Speaker 1 (03:31):
I just love that stuff.
The world, according to Kelly,within the analogies of fast
food Stay tuned, it's going toget even better.
So, when we're talkinginsurance agents, what is their
standard of care right?
What is their duty with regardsto taking care of your
interests versus their interestsversus, let's say, the company
they work for?
Speaker 2 (03:48):
All right.
Generic language on that readskind of like this An insurance
agent or producer has a duty touse reasonable care, diligence
and judgment in procuringinsurance.
Speaker 1 (04:01):
Well, that cleared that up, didn't?
It Sounded like that was offthe cuff.
So, bottom line, their standardof care is not fiduciary, no,
it's reasonable care.
Say it again.
Speaker 2 (04:14):
No, it's reasonable care.
So here's an important noteEven if you rely on an agent's
expertise, it's yourresponsibility to read through
the policy documents fordiscrepancies Interesting,
(04:34):
because at least in the state ofMichigan here, if you received
your policy it was delivered toyou and that's called
constructive receipt of yourpolicy.
It is on you to read throughthat because you have a free
look often.
Yeah.
Speaker 1 (04:42):
Usually so it's on you.
Yeah, usually so, it's on you,yeah, yeah.
So then, given this standard ofcare, that's sounds more like
suitability than it does ahigher level it is a suitability
.
Speaker 2 (04:52):
It's a suitability.
Speaker 1 (04:53):
So, within this standard of care, who's who's
looking out for Mr and MrsConsumer out there?
Who's regulated they're?
Speaker 2 (04:59):
regulated by the states in which they do business
, kelly Interesting.
So agents who sell mutual fundsare variable annuities.
In addition to the states,they're also regulated by the
Financial Industry RegulatoryAuthority, or FINRA FINRA that's
what it's called and then youhave the National Association of
Insurance Commissioners or theNAIC.
Speaker 1 (05:19):
Yeah, so basically each state insurance regulator
is a member of the NationalAssociation of Insurance
Commissioners, right, naic, andthey basically create or develop
or recommend a best practicefor insurance companies, agents
and so forth to follow and thenwithin every state, each state
can choose to adopt or not toadopt that, let's say, modeled
(05:42):
regulation or approach to doingbusiness.
Yes, okay, so when we'retalking, we're going to wrap up
this insurance agent side andagain we're talking in general,
whether it's property, casualty,health insurance, life
insurance, disability insurance,all sorts of insurances how do
they get compensated?
Speaker 2 (05:59):
It's commission-based and some insurance products
allow the agent to opt for anongoing fee.
I don't know how popular thatis anymore.
Instead of the upfrontcommission.
Speaker 1 (06:07):
Yeah, I think that ongoing fee is most popular
where you have fee-onlyfinancial professionals that
everything they do is fee-based.
Again, I don't know howprevalent that is, but I do know
fee-only advisors.
If they're not sellingfee-based insurance, they
probably aren't a fee-onlyadvisor, right?
All right, so let's move on toregistered representative,
(06:30):
otherwise known as investmentbrokers.
Give us kind of the lowdown.
And who these people are.
Speaker 2 (06:35):
I was one of those people because I came into the
industry as a registeredrepresentative for a large
brokerage investment bankinghouse.
So brokers are legally referredto as registered
representatives, meaning theyare properly licensed and
registered to buy and sellsecurities for their customers
(06:55):
through the company theyrepresent, and the company is
known as a broker-dealer.
And brokers typically earn acommission when buying and
selling securities inside theircustomers' accounts.
Now here's a distinguishingfactor Registered reps provide
non-continuous, point-in-timeinvestment recommendations
(07:16):
before a buy or a sell ortransfer within a mutual fund
family, which we discussed inour last podcast.
Before they can be transacted,the registered rep must receive
approval from the account owner.
This type of account isreferred to as a
non-discretionary account.
Speaker 1 (07:32):
So when they're incidental advice, essentially,
what do you mean by that?
Speaker 2 (07:38):
It's not ongoing and continuous, Not ongoing.
Thank you.
Speaker 1 (07:41):
Yes, the only time you get feedback from a broker
technically would be if theyreach out to you and talk to you
or you call them, in which casethey can or they will give you
feedback as a sounding board.
Maybe that's not the best thing,mark.
Maybe what we should do is doit this way.
That's sort of thatrelationship with the broker.
Yeah, usually.
(08:01):
Going back to our last episode,when we were talking about what
are your total costs?
Right, there's the fifth numberon the Fab Five on investing.
Right, we talked about A, b, cshare mutual funds.
Speaker 2 (08:13):
No, Kelly, you did.
Yeah, I did talk about that,didn't I?
Speaker 1 (08:17):
That was pretty good man actually.
Speaker 2 (08:18):
Thank God there aren't X, y and Z funds.
Speaker 1 (08:24):
I don't know what you're talking about.
I'm going to start a filibusternow with A share, C share Okay.
So the people that we'rereferring to when we're talking
about A, b, c share mutual fundsare brokers.
Yes, okay, and so a brokernowadays could actually pretend
or, let's say, earn money, sortof like the next two you're
(08:45):
going to talk about theregistered investment advisor,
investment advisor rep, becauseif I sell you a C-share and I'm
getting a 1% commission everyyear that you're invested in
that C-share, doesn't it look,smell and taste just like a 1%
fee from an advisor, with theexception of advisor will give
me ongoing supervision, advice,monitoring and so forth.
Speaker 2 (09:04):
Yes, in fact, it's not even a fairness issue.
It is the way it is.
Speaker 1 (09:09):
It's how the industry has evolved, right yeah, fair
or unfair, that's just the wayit is Right right.
So a broker can work withsomeone and a broker could be an
insurance agent with a broker'slicense and can work with
someone and sell them loadedmutual funds for their
retirement accounts, lifeinsurance policies for their
life insurance needs and or cashvalue life insurance as a way
(09:30):
to accumulate cash value in alife policy over time.
Speaker 2 (09:34):
Sure, okay, typically the products and the
investments that they offerwe've talked about, yeah,
individual stocks and bonds,mutual funds, exchange traded
funds, options, ipos which areinitial public offerings
annuities and otherinsurance-related products, if
they're licensed to sellinsurance.
Speaker 1 (09:53):
Okay, got it this guy was good.
All right.
So when we're talking aboutregistered reps, brokers, what's
their standard of care?
What are they responsible orhave to make sure they do on
behalf of their clients?
Speaker 2 (10:06):
An insurance agent or producer has a duty to use
reasonable care, diligence andjudgment in procuring insurance
With registered reps.
It is suitability, let thegames begin.
So under the suitabilitystandard of care, the registered
rep or the broker has aregulatory obligation to have a
(10:29):
reasonable basis for believingthe strategy or the transaction
is suitable for their client'sneeds, financial situation and
risk tolerance, investmentexperience, etc.
Interesting.
Speaker 1 (10:41):
Let's talk about the first investment I made.
In a world fraught withconfusion, one man will break
his silence.
Speaker 2 (10:50):
As a young lieutenant in the army and you still
haven't gotten over that.
I remembered.
Speaker 1 (10:55):
So when I went in to see an advisor that specialized
in working with military, heasked me what I wanted to do and
I said I'd like to grow mymoney.
So of course that gave him thesuitability definition that he
was looking for growthinvestment.
Okay, I'm young, I can take ongrowth volatility, and what he
(11:16):
was responsible to do is find agrowth-oriented investment.
In this case it was mutual fundand I believe it was the Janus
Growth Fund and this was back in1992.
And of course, growth was on atear for the next decade.
Speaker 2 (11:31):
And Janus was, I think, about 60% of the dollars
were going into Janus Absolutely.
Speaker 1 (11:36):
So, based on the idea of growth, it was perfectly
acceptable for him to recommendJanus Growth and I think he
recommended a couple.
There might have been a valueoption there, but my brain's
like I don't care about value, Iwant my stuff to grow, so let's
do the Janus Growth.
That's how I ultimately madethe decision and he didn't
(11:59):
suggest one way or the other.
Obviously he was going to getpaid either way and these were
A-share mutual funds.
So the first year of my lifeinvesting about 5% of what I had
.
Back then it was more, but 5%of what I invested went right
into his pocket.
I saw the deductions in myinvestment amounts, my principal
being invested monthly andthat's what he earned.
(12:22):
And of course, I ultimately Ithink they hit a skid in a
couple of years.
It might've been 94.
And I think I pulled out of itlike a knucklehead and so forth.
But just to give the sense, theadvisor, the broker they don't
really have a duty to give methe best growth fund in my
example, in my story, with thelowest costs, with the best
(12:46):
volatilities and all these otherthings.
They just got to meet me withthe overall, let's say,
definition of the investment.
This is a growth fund.
He wants growth matched.
Speaker 2 (12:57):
Right.
So suitability does not protectyou from unreasonable or
nefarious business practices?
Perfect, it doesn't.
So we go back to the character.
Yeah, you got it dude.
So I've known brokers thatoperated more as a fiduciary
just by their inherent characterthan fiduciaries masquerading
(13:19):
as a fiduciary with a brokermindset.
Speaker 1 (13:21):
Interesting, or at least less than honest, mindset
we're doing a podcast.
Speaker 2 (13:27):
So if we don't have incendiary claims in here that
are over the top.
Nobody's going to listen.
I forgot the tarn feathersbrother, you suck Okay.
Speaker 1 (13:36):
So then let's talk about who is looking out for the
consumer.
When we're talking aboutinvestment, bro, who's doing the
job?
Speaker 2 (13:43):
Well, we can talk about who's out there and then
we can follow up with that witha shorter list of who's really
doing the job.
Speaker 1 (13:49):
Yeah, let's talk about who's doing the job of
taking care and protectingconsumers.
Speaker 2 (13:53):
Well, they're regulated by the state
securities regulators in eachstate in which they do business,
and they're also regulated byFINRA, the Financial Industry
Regulatory Authority, and alsothe Securities and Exchange
Commission, or SEC.
Speaker 1 (14:08):
Most brokerage houses .
I think every one of them,every investment advisor, every
insurance agency has someone,maybe two or three people that
their job is to be the extensionof the regulators by ensuring
that clean business is beingdone, known as compliance.
Yes, those are the ones thatare in the trench lines up front
(14:29):
with all the agents, advisors,brokers, and they're the ones
that are responsible, sort of,to make sure that business is
being done proper, clean andeffective business.
Speaker 2 (14:39):
Right, and that's why the industry is a lot cleaner
in terms of good business, badbusiness, and clean business
meaning good business, right andthat's why the industry is a
lot cleaner in terms of goodbusiness, bad business and clean
business, meaning good businessis because of internal
compliance.
Speaker 1 (14:53):
So, lastly, how are these investment brokers
compensated?
How do they make money?
Speaker 2 (14:58):
Commissions off of the products that we had
mentioned mutual funds,individual stocks bonds,
exchange-traded funds,individual stocks bonds,
exchange-traded funds and I'msaying commissions generically.
Speaker 1 (15:07):
So, just like the insurance agent, they earn
commissions.
Yes, Different products albeit,but their structure of earning
money is through a commissionand typically those are upfront
paid within the next 30 days ofthe sale of whatever product
we're referring to.
And that's a commission.
They're not going to get paid aheck of a lot of money next
(15:28):
year or the following year and Ithink we've covered that in
C-shares maybe a little bit Hell.
Yeah, that's what I'm talkingabout and I know, in life
insurance there's a little bit,but nothing significant.
Speaker 2 (15:42):
It's a commission that is paid and the standard of
care, the scope and intent orintention of the standard of
care, is the same.
The wording is just different.
Speaker 1 (15:53):
Okay, so let's get into the next.
Really two, right?
The registered investmentadvisor, known as an RIA, and
the independent advisorrepresentative, known as an RIA,
and the independent advisorrepresentative, known as an IAR.
Help us pull this apart realquick, mark.
Speaker 2 (16:09):
All right.
An RIA registered investmentadvisor can be a standalone
operation, its own entity, or itcould be a separate entity,
subsumed within but separatefrom a large broker, dealer or
bank.
The IAR is the individual whooperates within that RIA,
(16:30):
offering ongoing and continuousfee-based advice.
Are you lost yet?
Are you lost?
Speaker 1 (16:38):
yet Right.
So I could work for Bank ofAmerica, bank of America owning
a registered investment advisor.
I could be licensed as theemployee working there as an
independent advisorrepresentative.
I might just for short say I'man investment advisor, I'm an
advisor, but technically thatgives me the authority now to
(17:01):
charge what for my servicesOngoing fees, ongoing fees, so
it's a fee-based account.
Speaker 2 (17:07):
Yes, and you can also be registered within Bank of
America as a broker registeredrepresentative receiving
commissions, yeah, so this getsreal confusing, right?
Speaker 1 (17:18):
It does Now riddle me this Batman.
Could I also have insurancelicenses and then recommend
insurance to clients, eventhough they're at Bank of
America?
And geez, I didn't know, youguys did life insurance too.
Well, I like you so much andthe Coca-Cola was tasty.
Yeah, let's do that as well.
All right, so with regards toregistered investment advisor
(17:39):
and their IARs, what is theirstandard of care?
Speaker 2 (17:42):
What do they get held to in terms of responsibility
to their clients, doing what'sright for them and putting their
interest first, just like thebroker should be doing under
suitability.
We all know what doing what'sright is about.
I don't need to use terms likesuitability or the one I'm going
to use right now.
Terms like suitability or theone I'm going to use right now,
(18:05):
fiduciary, don't, don't don't.
We love that term.
Our industry does well.
You know, I'm operating as afiduciary, which means I am
compelled nobody says I want to,but I am compelled to operate
and make all of my judgments anddecisions and transactions
solely in the better interest ofyou, my client.
See it says so right here inthe contract.
Speaker 1 (18:27):
That is the correct answer.
Isn't it interesting thatfiduciary is now part of sales
and marketing pitches from folksin the business?
If you're not working with afiduciary advisor, you should be
.
I'm a fiduciary advisor, and ifyou're not working with one,
maybe you give us a call.
I mean on and on and on.
It's now a marketing term morethan it is a technical term when
(18:50):
it comes to legalresponsibility to your clientele
.
Speaker 2 (18:53):
I think it's watering down the higher order, the
higher calling of people to getinto the industry that really
want to help people, becausethat's a character issue.
Yeah, it is.
Speaker 1 (19:05):
It's story time as a reminder and I know we went
through this but Bernie Madoffhe owned a registered investment
advisor.
He was an investment advisorrepresentative and yet we all
know the story of Bernie Madoffembezzled billions from his
clientele, so he was a fiduciary.
So if you think about that, doall fiduciaries immediately have
(19:27):
our trusts?
I don't think so.
Just because you're a fiduciarydoesn't mean you're beyond
reproach.
Speaker 2 (19:37):
Correct.
There is a higher oversight andthe bar is set quite high as
opposed to suitability.
That doesn't mean you're reallyworking with a fiduciary,
because I believe part of beinga professional is a couple of
components here.
You have an esoteric body ofknowledge, you have also a
(19:59):
calling and you operate at alevel of professionalism that
inherent in that calling is Iput my clients first and I don't
have to wave a banner tellingyou that's what I do.
Yeah, when I hear trust me, I'ma fiduciary, I scream jump, run
the other way.
Speaker 1 (20:15):
You do that a lot, though I mean even when I say
boo when you come out of thebathroom as soon as this podcast
is over.
Speaker 2 (20:19):
Mark Robinson has left the room.
I danger when this podcast isover.
Mark Robinson has left the room.
Speaker 1 (20:24):
My danger will so help me a little bit more.
The RIA and the IndependentAdvisor, rep IAR, who is
basically making sure andsetting the rules for the
advisor, the investment advisor,investment advisor
representative, when it comes tothe business that they do,
depending on the size of theassets.
Speaker 2 (20:44):
It could be the state and that's under $100 million
Above.
That is the Securities andExchange Commission, sec.
Right, so SEC is the godfather,so to speak, when it comes to
looking out for consumers,practices, businesses for
registered investment advisorsyes, yes, and it has an
illustrious career, even rightback to its founding, of always
(21:06):
setting aside politics, alwayssetting aside special interest,
to work solely on the managementand flow of business to the
better interests of the clients.
And who better could they putin to first be the head of the
SEC, but that whiskey runner,joseph Kennedy?
You mean the first head of theSEC back?
But that whiskey runner, josephKennedy.
Speaker 1 (21:24):
You mean the first head of the SEC?
That's right.
That's right.
Back in 35, 36, whatever it was, yeah, yeah, and he was going
to clean things up.
Speaker 2 (21:30):
Do you know why I bring that up?
Because you're angry, Forgiveme.
Speaker 1 (21:33):
Father, for I have sinned.
Speaker 2 (21:36):
Yeah, it's total bullshit on stilts, regulatory
authorities, and there seems tobe this moral vector that,
because you work for FINRA or astate regulator or the SEC, that
you are acting as a fiduciaryand you have that calling of
truly looking out for the betterinterest of the consumer, that
(21:56):
hapless consumer that alwaysgets the rubber chicken over the
head.
Speaker 1 (22:00):
That's right.
Well, we know, by virtue ofEnron trading.
It's the rubber chicken overthe head.
That's right.
Well, we know, by virtue ofEnron trading fiasco.
Regulators are like any otherjob out there.
Some of them do their job well,others don't, and when they
don't, a lot of bad thingshappen.
We can look at Bernie Madoff.
A lot of bad things havehappened because regulators
didn't do the regulatory jobthat they're required to.
And guess what?
(22:27):
In the future there are goingto be regulatory events that
regulators didn't do their jobin, and there's going to be more
bad stuff that happens in thefuture.
It's this continuous wheel oftime and we rhyme.
We might not exactly repeat,but damn, that stuff rhymes all
the time.
So we get back to this.
How do we help you develop yourbullshit sniffer?
One part is upping your gameand knowing a little bit more
than what you know now, so thatwhen you're involved with
looking and working on yourpersonal finances and having
(22:48):
professionals in your lifehelping you, good on you, great
job.
Just remember Ronald Reagan'sfamous lines trust but verify,
don't trust blindly.
Have the mechanism to verify.
Speaker 2 (23:01):
Yeah, and trust has a rapid rate of obsolescence.
By the way, it has to beconstantly re-verified.
Say that again, though thatsounded great Trust has a rapid
rate of obsolescence.
Say it again.
Speaker 1 (23:15):
Are there certain types of professional
designations that thesefinancial professionals bring to
the table that help you todetermine whether they bring
strong game knowledge,experience or not?
What kind of designations mightthese sorts bring?
Speaker 2 (23:28):
Well, there's all sorts of designations and they
became very popular in the 1990sand some of them were, you know
, three-hour courses and youcould have letters after your
name.
We are so desperate for that inour industry.
We're just salespeople, most ofus, and when we plumb the
(23:49):
depths of our true selves weknow I'm just a salesperson but
I love to hold myself out ashaving special knowledge, as a
witch doctor or high priest thatonly I have access to and you
need to obey and follow.
So we get crazy assdesignations, most of which
really aren't anything, that aremeaningful, but then others are
(24:11):
where there is certification orthird party certification or
are recognized by FINRA.
Speaker 1 (24:17):
Now in life insurance there's a thing called a
chartered financial consultant.
Yes, and that's sort of that,granddaddy.
So is a certified lifeunderwriter.
Clu CLU right Big deals bigdesignations in the insurance
world, in the investment land.
You have the CFP certifiedfinancial planner.
You have the CFA certifiedfinancial analyst yes, which is
(24:38):
also a big daddy.
It takes about three years ofstraight study and test passing
to get your level and that'sprimarily at the corporate level
or at the institutional level.
Having a cfa, they rarely are inpractice small, small
institutional and retail Iusually in my past have run into
cfAs outside of the largeinstitutions in spinoffs where
(25:01):
they've started their ownorganization.
They're a trader, they're ahedge fund manager, they're
something of that nature wherethey really need and desired a
hugely brawn in terms ofanalytic knowledge, skill
certification and so forth.
And portfolio management andportfolio management.
Yeah, so interesting.
With regards to brokers, whatcertifications do?
Speaker 2 (25:23):
brokers.
You know a straight old linebroker really didn't need
certification.
They're savvy and insight wasinto the market, market
directions, individual securityanalysis, technical analysis
also and recommending stocks,bonds to buy and mutual funds
Cool.
Speaker 1 (25:41):
So when the market comes at the consumer with
insurance agent, investmentbroker, investment advisor,
representative all of which sortof refer to themselves as
advisor, is there a differencebetween registered investment
advisor versus I'm a financialadvisor?
Speaker 2 (26:00):
The industry made sure that it acknowledged the
difference, but not in a waythat the consumer could really
apprehend the difference.
Epic fail.
So we had investment advisor.
Remember, we talked about theInvestment Advisor Act.
That's spelled with an E.
Speaker 1 (26:18):
So the advisor that relates to the registered
investment advisor, thefiduciary standard of care is
spelled with an E.
Speaker 2 (26:26):
V-E-R.
Speaker 1 (26:28):
A-D-V-I-S-E-O-R.
We could have done a SesameStreet thing right there.
It would have been phenomenal.
Anyway, go on.
You've already ruined themoment.
Speaker 2 (26:37):
Well, we should really do a Count Dracula with
you with all your numbers.
Oh, I like that, you know, Ilike my calculator.
All right, I digress, all right.
So we've talked about theadvisor with the E, so the
industry came up with advisorwith an O.
Oh really, oh really, you're anadvisor.
Speaker 1 (26:55):
I didn't see that coming.
Speaker 2 (26:57):
Interesting.
So that's why we have financialadvisors.
Oh, I had no idea.
That's why it's a non-legalterm also.
Speaker 1 (27:05):
So if I see someone with a business card and the
business card says I don't knowfinancial advisor with an O on
the business card, that's sortof a tell, isn't it?
If I'm playing poker with theperson, that's a little bit of a
tell, isn't it?
If I'm playing poker with theperson, that's a little bit of a
tell.
Are they really working with aregistered investment advisor or
is it just a generic term theydecided to put on their card to
(27:25):
explain their role, theirresponsibility, their position
in an organization.
Speaker 2 (27:30):
It's a generic term financial advisor.
Instead of putting remember onthe cards, it used to say
registered representative.
Speaker 1 (27:37):
I mean, it still does , it still does, I does.
I think you have optionsregistered food allergies yeah,
so long.
Speaker 2 (27:42):
Yeah, so you have the registered representative and
then talking about your positionin the company.
Usually that is by investmentof investment executive.
Take two um, how did you?
How did it happen?
That's awful.
So investment executive.
Take two, that's all folks.
So investment executive, vicepresident, senior vice president
(28:05):
, which has nothing to do withtheir acumen, it's just that
they are good producers, yep,and so they matriculate up
through these terms Interesting.
Speaker 1 (28:14):
Yeah, interesting.
Speaker 2 (28:15):
We've talked about insurance agents, brokers,
registered representatives, andwe've talked about investment
advisor representatives, IARswho charge a fee within the RIA.
I'm talking to one of thosethat has the hat trick as you
call it.
Speaker 1 (28:31):
They're licensed in all three.
Speaker 2 (28:33):
Yeah, what is inherent and problematic in
dealing with someone, at leastinitially, with someone that has
the hat trick, so to speak?
Speaker 1 (28:42):
Well, I think there's two sides of this coin If
you're working with someone witha hat trick, and they are.
This has three parts.
Speaker 2 (28:48):
So do you really want to use the two sides of the
coin?
Speaker 1 (28:50):
Yeah, because we're talking about one that operates
with character and one thatoperates without character.
So I think, if you're working,with someone you didn't want.
Speaker 2 (28:58):
To have fun with me on that, I didn't want to.
Speaker 1 (29:00):
No, leave me alone.
Stop touching me, Okay.
So if you have the hat trickand you're working with someone
with high character, we refer tothem generally as a
strong-handed advisor.
They have insurance licenses,they're a broker, licensed as a
broker, and they're alsolicensed to be an solutions to
(29:40):
solve for your planning needs.
Always, same company that haslife insurance is an investment
broker and an investment IAR,but doesn't necessarily operate
with the strongest character.
There you may, and most likelywill, encounter someone that's
acting on that conflict ofinterest, recommending solutions
(30:01):
and products that may benefitthem more than they benefit you,
and they might not be lookingout for your best interest,
while all the while making senseto you, the consumer, as to why
they're recommending X, B, Yand M as an example.
Speaker 2 (30:16):
You have yet to learn your alphabet in the sequence
that was Cyrillic.
Speaker 1 (30:19):
Yeah, that was a Cyrillic alphabet.
Yeah, so M's are H's and K'sare K.
Speaker 2 (30:24):
And then there's some crazy stuff just isn't in the
English alphabet Indeed, indeed.
So, kelly, what are thetakeaways from today?
Wrap this up.
Speaker 1 (30:32):
So the who's, who and what do they do?
Wrapping it up, the idea is tohelp you understand that there
are, broadly speaking, threedifferent professionals that you
will customarily meet whenyou're working on financial
planning, financial objectivesand so forth.
Each of these professionals,whether they're an insurance
(30:52):
agent or investment broker or aninvestment advisor
representative, are required andare monitored by different in
some cases similar agencies,regulatory agencies out there,
and that, depending on how theywant to solve or recommend to
solve for your planning needs.
Every insurance agent out theretypically has a bias to
(31:14):
insurance to solve your problems, so there's always an insurance
product to solve your problems.
If you're a broker, well, everybroker out there learns how to
solve your problems withinvestments that pay commissions
or spreads and markupsmarkdowns, depending on what
they're working with you on.
If they're an investmentadvisor rep, they're earning fee
(31:34):
income and they're held to thehighest standard of stewardship,
that being fiduciary, at leastfrom the regulatory standpoint.
So hopefully, if you work withprofessionals, if you interview
professionals down the road, youcan use some of this knowledge
to start discerning what thatprofessional truly is, what
(31:55):
standards they're held to andhow they're going to get paid if
you end up working with themgoing forward.
How was that?
Speaker 2 (32:01):
That's good.
Speaker 1 (32:02):
Pat me on the back buddy.
Pat me on the back.
Speaker 2 (32:05):
Come on, scratch my ear, scratch my ear.
You know I've been under thetable here.
I thought I was petting the dog, but it's your shin, it's a.
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