ANNOUNCER: You’re listening to Retirement Radio, the contents of this show are the opinion of Mike and his guests. Do not use this content for investment decisions, legal or tax advice. Consult with a licensed financial professional or conduct your own due diligence when making investment decisions. This show is pre-recorded before it’s actual airdate. [MUSIC] You’re listening to retirement radio, and now your host, Mike.
MIKE: Alright, everyone. Settle down now, hey thank you so much for listening to retirement radio, the nationally syndicated show getting you the transparency that you deserve. All right, now I am Mike, I’m your host, we got a great show lined up today, we got three people I’m interviewing today, three purebred fiduciaries, with one, we’re talking about the fees, how they can significantly hold back your performance, and how you can find out if there are secret fees that your financial professional is making and not telling you and more.
MIKE: I know, sounds gossipy, right, it’s like the Kardashians all over again, no it’s not. But you need to know this because it could significantly hold back your performance and make a significant difference on your retirement. Now we’re also going to go over some last minute tax tips, before the tax season is officially over, I know, awesome, so glad this is ending, we all just hate filing the taxes, it’s a big hassle, right. Now lastly, and this is our last interview today, we’re going to be going over, we are going to be talk about market protection, something your banker and broker probably isn’t or won’t tell you about okay.
MIKE: From a fiduciary standpoint, right, just forget about that buy and hold crap. Now keep in mind here, here’s a fun little tidbit, if you don’t know, the market has a history of crashing every seven or eight years. If you ride the market down with the others, like what happened in 2008, it could be enough to force you out of retirement, or if you’re not retired yet, push back your retirement date for a few years, at least. Stay tuned for the whole show, we got that and more today, on retirement radio. Now, today’s show is brought to you by Decker retirement planning, a safer approach to retirement. With offices throughout Washington state, Utah and now California, they are dedicated to helping you find a safer approach to your retirement. Thank you so much to you guys for putting on this show.
MIKE: Now, before we dive into the details with today’s line up here, I’ve got to tell you something I overheard the other day, I was at snowbird, uh, skiing, right, incredible snow, it was waste deep powder, oh my gosh, I-I couldn’t believe it. Still in March we’re getting something good, once in a while. But I overheard this guy in the line, talking about this new investment he had. Right, and so in the industry, especially with retirement planning, my ears perked up. And to my horror, I heard him tell this other guy that he had got a variable annuity.
MIKE: And I couldn’t believe it, he was so excited about his recent decision to buy it, it was obvious that he had no idea what he had just purchased and had no idea what he was getting into. You see, there’s a saying in the business, it says that variable annuities are not bought, they are sold. All right, that’s to say, you heard me right, they are sold because they are so bad that if people actually knew what they were getting, personally I doubt anyone would ever buy one. They are such a toxic investment, it’s terrible.
MIKE: All right, and people are just, are going to trust their salesman, or whoever is suggesting this, so our first segment here on this topic we’re going to get started with a bit of clarity. [ANGELIC CHOIR] Variable annuities are a type of investment that allows you to invest in the stock market with a guarantee. Now, as Investopedia likes to call it a mutual fund with an insurance wrapper. Even though the wrapper is cute and the bow is-is you know, on top and nice and pretty, the insides of these investments are garbage.
MIKE: Okay, introduced in 1950s, variable annuities were meant to combine the characteristics of a fixed annuity, with bonds and mutual funds. You can own those extra benefits while having more control of it. But can we just put that in perspective, I can just see you know, the guys in the room where it happens, right, and I can just see them talking it over, right, and-and they’re just saying like, hey, you know those annuities that don’t make much money, yeah, so let’s take that same format, and let the investor choose which mutual funds or bond funds they want. Let them feel like they’re in control, it doesn’t matter. The best part is, we will limit their options, so no matter what we’re making that extra money on fees, that we don’t even need to disclose.
MIKE: If they complain, well, we can just remind them of that guarantee that they have, it’s okay though, it’s okay. Because that guarantee, they only get when they die. It’s perfect. Sounds stupid, right? Pretty much is, but let’s see what the SEC says about this. Now according to the SEC, the financial professionals who sell variabilities, quote, have a duty to advise you as to whether the product they are trying to sell is suitable to your particular needs or not. They have a duty, oh my goodness. [LAUGH TRACK] Because that never stopped anyone from doing something stupid. [APPLAUSE]
MIKE: No, but seriously, like what kind of oversight or-or regulation is that? Just giving someone a duty and expecting them to follow every ethical and honest law, while following the law? I’m sorry, it just, it doesn’t seem good enough, you know, it’s cute and all, but check out what the disclosure say on variable annuities, right, this is kind of like a call and response between the SEC and the duty they have issued, and the variable annuities and the disclosures that they write. Okay, here we go, it says quote, we do not provide any investment advice and do not recommend or endorse any particular investment portfolio.
MIKE: You bear the risk of any decline in the account or the account value of the contract resulting from the performance of investment portfolios you have chosen. That sounds like a cop out, right, but no, check this out, right, it’s kind of like that movie Warrior, right, with Brendan, who’s a high school physics teacher, at the bank, I don’t know if you saw this or not, he’s trying to keep his house right, and he’s talking with the banker, that he’s been using for some time.
MIKE: Just listen to how the banker defends himself even when he’s wrong.
BANKER: Numbers are what they are, Mr. Conlon.
BANKER: The numbers are what they are, Brendan. I mean you’re a math teacher, right, you can appreciate that.
BRENDAN: I’m a physicists teacher. I teach physics.
BANKER: Physics, okay. But the bank has got to go by the new appraisal figures and according to these figures, you’re upside down on your mortgage, you understand?
BRENDAN: Yeah, you’ve said that like three times. I’m sorry, but I get that, I’m asking you is there something else you can do? Not the bank, you, can you shift things around, restructure?
BANKER: You’ve refinanced twice already.
BRENDAN: ‘Cause you advised us to do that. You told.
BANKER: Well I presented you with that option. But that was your choice.
MIKE: Ew. Isn’t that just disgusting how bankers, brokers, agents, or other sales people can get away with that, just a reminder they’re not bad people, okay. I want to be very clear with this though, they are just doing their job. Their job pushes them to sell bad investments, to give bad advice, to fulfill quotas. All right, if you didn’t catch last week’s show listen to it, I spoke about the purebred fiduciary, what that means to you, and why you need to be talking to someone that’s a purebred fiduciary, right.
MIKE: Arthur Levitt the past SEC chairman, said that, it just, I mean come on, I don’t think we can do this anymore, but if you didn’t catch last week’s show, go on iTunes or Google Play or Soundcloud and just search for retirement radio or you can just go to retirementradio.org, to get those links there. It’s on there, you can listen to it, it’s worth your time. Now back to the, back to the point here, I have tried to paint a fair picture of why people might see the value in the theory of variable annuities, or like, why I, smart people might be able to, you know, get in this investment, okay.
MIKE: But they’re being tricked into these investments. It’s time to peel back the onion, and show you the true nature of these investments. The mutual funds and investment allocation options themselves are subpar. To say the least. I am careful to use superlatives so please recognize that what I’m about to say is very real. Almost all of the investments you have to choose from in these variable annuities have fees that you won’t see on your statement, but they definitely hurt you in your performance every year.
MIKE: We’re talking about 12B-1 fees. Management fees. Acquired fund fees. And expenses. Along with and I’m not kidding you, how generic this is, there’s literally one called quote other expenses fees. Who knows what that is, they might as well add a fee for having to charge you fees because that might take them extra work too, I mean these fees that are not disclosed on your statement, add up on average to be around 1.2 percent, as opposed to what a normal fund would be, which is 14 basis points, okay.
MIKE: That’s almost literally, that’s astronomically more than what you should be paying. That’s insane, now you can see why they chose for you which options that you would have to choose in this, because they would regardless. You know, in Vegas, how the house always wins, the variable annuities, the insurance companies win. Yes, they do, sorry to break the bad news. Okay, now a big reason why these investments are so popular is because the insurance agents, the salesman, get paid around eight percent for selling you this product. If you put a 100,000 in an variable annuity, he could get around eight thousand just boom, just like that. Now, compare that to other investments, like a diversified portfolio in stocks and bonds and, wait a minute.
MIKE: That kind of sounds like the exact thing you’re trying to accomplish with a variable annuity. Isn’t that the same investment but without the death benefit guarantee? Oh that cute wrapping paper that we talked about earlier, yeah, it’s expensive, and it’s costing you a ton. Especially for something you only get when you die. So much for that last you know, it’s kind of a joke, but that last check that you want to bounce when you die. Yeah, there’s going to be a large lump of, lump sum of money that you won’t be able to touch. And I’m using large very liberally here, I mean, how large will it really be if it doesn’t make any money?
MIKE: Now, let’s forget about the eight percent finder’s fee, right, and the other fees in the funds, that you can get, that you can pick that pay the broker, the financial institution and the insurance company every year you own it, let’s talk about the other fees, that’s right, you heard me, the other fees with a variable annuity and yes, there are more. These fees can be hidden, so we went through a number of prospectuses to find out what was really going on. Here are some examples of fees that are charged in variable annuities.
MIKE: There’s the insurance company fee, the separate account product fee, the mortality fee, and expense fees, the administration fees, just like the mutual fund fees, the head administration fees, there’s an administration fee for the insurance company as well. There’s also a death benefit rider fee, which is optional but most people seem to want to get that even though it costs a lot extra. There’s account fees, guarantee lifetime withdrawal benefit rider fees, guaranteed lifetime withdrawal benefit death benefit rider fees, withdrawal or surrender charges fees, and transfer fees.
MIKE: You can pretty much get a fee for doing almost anything, there’s a fee if you are alive, there’s a fee if you die. There’s a fee if you keep all the funds in the investments, there’s a fee if you move them all out. It wouldn’t surprise me if there was a fee that uh, for choosing to do nothing, you know, the markets about to tank, and you want to put it all in cash or in a money market, because you want to shield yourself from the market crash. Oh, wait, there is. That would fall under the administration fee, and the account fees. Is this starting to feel like a situation where you can’t do right?
MIKE: It kind of feels like Vegas, right, and the, your agent talked about this idea that you’re going to win big, and you know, get that jackpot in the slot machine, but after these pulls, your slot machine just isn’t working out, sorry guys. Maybe next time. Shouldn’t be that way. The fees on this variable annuity that we were looking at, in particular, add up to 6.8 percent every year you own it. How in the world are you supposed to make money when you are paying that much? It doesn’t make sense. And this is just a middle of the road variable annuity that we found and went through.
MIKE: Now, I get that story, the tortoise and the hare, right, slow and steady wins the race, okay, and variable annuities are supposed to help guarantee and regulate with the markets, but if you put a crate of bricks on top of the tortoise, it’s not going anywhere. It’s just, that’s just how it is, even in the prospectus, it explains that fees will slow you down, which I was happy to see, right. Of course it was far back in the very, very back and to be honest, reading a prospectus like a variable annuity, kind of feels like reading the iTunes terms of conditions.
MIKE: It just keeps going. Oh, and a quick aside on the prospectus, on the very top the introduction admitted that it had complex jargon in the writing, it said quote, because the complex nature of the contract, we have used certain words or terms in this prospectus which may need explanations. That’s like admitting that you’re going to try and confuse someone into buying the product, but anyway, back to the unreasonable fees. We found where they explain them, and they gave two examples, check this out. The first option said if you decide to go with us, and I’m putting sarcastic quotes around this, quote, all the benefits invested your, in a 10K in this variable annuity, after ten years assuming you earn five percent on the funds, you would pay around 5,132 dollars minimum.
MIKE: To put that in perspective, your 10,000 after ten years would only grow to 11,157 dollars, making you 1,157 dollars. But the insurance company made five grand. In case you didn’t catch that, you literally earned around one percent each year for ten years. Remember that you are paying the minimum fees you would pay, and they can fluctuate and get higher. Now, if you decided not to add any of these so called benefits, you still have fees associated with the account. And you would have paid a minimum of 2,244 dollars in fees. Your 10,000 would have grown to 14,045 dollars, which is a 3.5 percent growth.
MIKE: Okay, but keep in mind the S&P 500 averaged 5.7 percent with dividends reinvested since 2,000. Both investments don’t have downside protection, the variable annuity only helps you after you die. Kind of pointless, I know, but it’s still there. I guess. Whatever. Buying the index with roboinvesting would have beat the variable annuity by a lot, net of fees. Okay. When I started, when I was reading this section though, for the first time, it tricked me. I’ll admit it, okay, it did because the way they word it made it sound like the investor was earning that 5,000 dollars instead of the insurance company.
MIKE: It was almost like Stockholm syndrome or something the way they worded that. Now here’s the scary thought, going back to performance with a variable annuity, right, the S&P from 2000 to 2012 averaged around one percent dividends reinvested. If you had purchased the variable annuity around 2000 and you wanted your money, in 2012 or before, the fees would have put you under your watermark. No money made. Now we’ve been talking about variable annuities so far in each, or one in each, uh, in this example. Each one seems to be built differently, which is by design. Right, there’s more than one way to skin a cat.
MIKE: Which by the way is a terrible expression. What’s wrong there, but then again, variable annuities are terrible investments, so I guess we’ll use it. Okay. They make each one look a little different as a marketing ploy to try and gain as many assets as possible. You can’t fault them, they’re trying to run a business. Right, I read an article yesterday trying to put lipstick on the pig, so bad, saying things like it’s not as bad as it used to be.
MIKE: I hate to break it to you but slightly better doesn’t mean good. It just means slightly better. Right, if fees were six percent, and they’re now 5.5 percent, I still wouldn’t do it. Now you could say that they are slightly better, it still doesn’t change the fact that they’re too high. I love the comparison of some of the uh, the benefits being optional, right. Oh, all right, so you can pay high fees, or you can pay even higher fees. That sounds like a good idea. No it doesn’t. It doesn’t make sense, they also said that there are more subpar accounts and investment options in this article.
MIKE: Oh boy, so the list of bad choices got bigger, how can I thank you? All right, now I’ll admit to being a little snarky about this. You got to understand though, I’ve seen so many of these come through, and I’ve seen so many angry, frustrated people with their previous banker, broker, insurance agent, that I just don’t have respect for this product still being pushed. It just, it’s disgusting, in an attempt to be as fair as possible, and to see what was going on with a wide view of these products, though, we did pull over 200 variable annuities, actual client verified accounts, from reputable insurance companies, all over the nation.
MIKE: And found the average is, the average end return of these investments without withdrawals or early surrender fees. So just trying to paint the fairest picture possible and guess what, the average was around 2.1 percent average annual return. These are eight to 12 year accounts, earning a pathetic two percent. Who in their right mind would want to do something like this, it doesn’t make any sense, and they don’t have downside protection, just that stupid guarantee that when you die, so I get that some people have you know, are a little bit risk adverse, right, and they put their money in CDs.
MIKE: That’s fine, CDs are principle guaranteed, you see what you get, that’s fine, right. But when you think you’re going to get seven plus percent on this high hope sales pitch, and then reality sets in, and you only get around two percent or less, you are crushed. Now you might ask what about the income streams they provide? It is true, you can use variable annuities like other annuities, and get a lifetime income. But let’s be very clear about how this works.
MIKE: Okay, I like how Investopedia does a nice job explaining this. If you annuitize the contract, terms are frozen. Say you put 264,000 in annuity, at the age of 60 and accept the insurance companies offer to pay you a thousand dollars per month for the rest of your life. You will have to literally live until the age of 82, to break even on the contract. If you live past 82, the insurance company must continue to send you the monthly check, but if you die before you reach the age of 82, the insurance company keeps the remaining funds. So even if you die as early as 63, the insurance company retains the balance of your 264,000 dollars.
MIKE: Many investors find this hard to swallow. Well yeah, it doesn’t make any sense, I was just talking to an advisor uh, the other day that actually, this week, about their client’s case who had 1.5 million dollars in annuities. We ran the simple math, and this is math that probably an elementary school person could figure out right. And this person who’s in their mid-50s, has to live to the age of 80 to break even on the principle, on the principle. How would you feel if you had 1.5 million dollars in cash earning nothing, and if you die too early, it would just go away.
MIKE: That’s kind of what it feels like when the reality sets in with these kind of investments. CNN did a review and even they figured out it was a bad investment. Though they did attempt to be neutral they said, quote, if you decide to buy variable annuity, you should limit yourself to one, with low fees, and forgo the expensive options that dampen long term growth, end quote. No one feels good after eating too much candy, right, the same goes with variable annuities. Your portfolio may be fine, if you put a little crap in there, but too much and you’re going to fill it.
MIKE: In the end, the best way I can honestly describe a variable annuity is like that time I was trying to park in Mexico. I found some free parking, there was a sign and everything, but then this guy walked up and said, oh no-no. It’s not free, it’s just, it’s ten bucks. Now I’m fluent in Spanish, okay, but I didn’t want to make a scene, so I was like, all right, fine, here’s the ten bucks, just go away, okay. I parked, had a great day, and then came back and this other guy said, hey it’s ten bucks for the parking lot, but you pay when you leave. And I said, no-no, the other guy said you pay when you get here.
MIKE: And he says, no, that guy doesn’t work here. Sorry. The only way I could get out is just to pay this guy ten bucks, and keep going. No matter what I did, I just couldn’t win. I was getting charged left and right. That’s kind of like what variable annuities do and it blindsides you. Because they’re not disclosing all of the fees in such a way that you should know. If you want to invest in stocks, bonds and mutual funds, in a very illiquid way and pay a ton of fees, you can be my guest. Now if you already have one, it’s okay, you probably didn’t get disclosed all this information, just call me.
MIKE: Hit #250 right now on your cell phone and say retirement help, you’re going to get to my people, I’ll personally call you back and put you in touch with a purebred fiduciary that can help you get out of this mess. There are plenty of options, it’s just going to take too long to go through them, and it’s a case by case situation. Just dial #250 on your phone and say the keyword retirement help. They will connect you to me, or you might have to leave a message if it’s afterhours, but I will help you, okay. I will get you in contact with people to help you so we can get out of this.
MIKE: All right, that’s all I’m going to say on the matter, okay if you want more information I recommend going to retirementradio.org, you can check it out, you can call me if you want, that’s 844 506-8600. That number again is 844 506-8600. That goes directly to me. Okay, I love to hear from you, love getting questions, interacting with you, and at the very least, connecting you with purebred fiduciaries, so I can get you the transparency you deserve. All right, all right everyone, so we’ve got John Switzer here, with us, a licensed purebred fiduciary from Kirkland Washington. I’m very excited to have him with us on the show today.
MIKE: Now, just to be transparent, he is not a CPA, he is though a retirement planner that has a ton of experience and he’s seen a thing or two, so we’re excited to have him on the show today, John, it’s tax season, what are some of the most common mistakes that you’re seeing with retirement planning and the investments that you’re seeing today.
JOHN: Well I’d say one of the big mistakes is when people don’t start saving for retirement early on. Because what they do is they give up compound interest in the form of tax deferred growth. Because when you start investing, or contributing into a 401K, a 403B, a TSP, or a IRA, it allows you to have tax deferred growth that will grow over time and allow you to have a higher rate of return because the principle is larger due to the tax deferred growth.
MIKE: Now John, one of the biggest topics we talk about on this show and I wanted to ask you is one of the biggest missed opportunities that I have found at least, for tax optimization in retirement planning, is the Roth conversion. Can you talk to the retirement radio listeners about some of the different ways you can convert assets to Roth and which situations would be best for different scenarios?
JOHN: Well when it comes to doing these Roth conversions, let’s just start by talking about why we want to do them? The first reason why is because number one, all future growth is all tax free.
JOHN: Meaning once you convert IRA into Roth, there’s no longer any tax consequences on any gain. So that’s the first big reason you want to do them. The second reason is as you get older, later on in life, you can have distributions that will come back to you tax free. And for any distributions that you don’t use, they actually pass onto your beneficiaries, tax free. So that’s really the reason why we want to do these IRA to Roth conversions. And then I would say there’s kind of three stages that we look at when it comes to doing these conversions.
JOHN: So, if you’re still working, and you haven’t retired yet, we want to hold off on doing these conversions. Because your effective tax rate is still pretty high, due to the W-2 wage that you have coming in. So that’s the first stage. The second stage is after you do retire, we want to look at doing these IRA to Roth conversions over say the first five to seven years after retirement. And the reason why we don’t want to do them all at once is because what it does is it puts you in the highest tax bracket. So on an annual basis, what we do is we look at okay, where’s your year to date income?
JOHN: Where’s the tax bracket at, and then we allow our clients to convert up to that tax bracket. So therefore we’re never pushing them up into the next tax bracket. So that’s kind of the second stage or the second situation where we have people who are doing these IRA to Roth conversions. And then finally the last situation or the last stage is when people are over the age of 70 and a half. After the age of 70 and a half, you still have the ability to do these IRA to Roth conversions, but no longer is it really that you’re doing them for you, it’s usually you’re doing it for you beneficiaries. Meaning continuing to convert out after the age of 70 and a half, what you’re doing is you’re converting those assets so upon your passing, they would pass on to say kids or other beneficiaries tax free.
MIKE: Awesome. John, thank you so much for joining us on the show today, John Switzer everyone, from Kirkland Washington, purebred fiduciary, great to have him on the show. Hey retirement radio listeners, if you guys want to add a topic to the show, just email me, Mike@retirementradio.org, and I’ll include it in the show. Now our next guest here is Ben Coval [PH]. Another licensed purebred fiduciary, but from Seattle, so we’re favoriting our Seattle people I guess right now, but Ben, incredible advisor, but also writing his book, Common Sense Defense to Retirement Planning, coming out soon. Ben Coval, thank you so much for joining the show.
BEN: Thanks for having me.
MIKE: Fees are a hot topic right now, there are a lot of people trying to minimize their fees, in their investments, Ben what should some fees you should look out for and really just try to avoid.
BEN: Well obviously the variable annuities are very high fee based vehicles. As was discussed earlier, the truth is, is that you don’t want any fees from an investment vehicle that will lower your overall potential for income sources, so for an example, I had a client who got into a pretty bad annuity scenario, where their return was consistently under the fees they were paying for the riders that they were being charged.
BEN: So the results was that every single year they were bleeding money. And they were told some fantasy by this insurance salesman, that they were getting these magnificent returns when in reality their income and retirement kept on going down. Now those are the most toxic fees that you can have, when it comes to retirement assets and those you need to avoid at all costs. This client had to make a very difficult decision, they either had to accept the fact that they have less spendable income in their golden years, or they had to back out and have massive surrender fees.
BEN: To get out of these toxic investment choices. That is the sad truth of where most of these products fit is high fee based and very low return or very low value.
MIKE: Ben, I’d like to play a clip with Tony Robbins about this very topic here and them I’m going to ask you a question after. Listen to what Tony Robbins has to say and keep in mind, he’s not a financial guy, he’s just a guy that looks into the details and brings to light things. This is just crazy.
TONY: Ten to 15 times more can be spent by one person compared to the neighbor right next door for the same fundamental product with no additional value. You got to say how is that possible? Well so much of what you pay is buried in the fine print. The language is so confusing, it almost requires a foreign language to understand. Revenue sharing, expense ratios, wrap fees, soft dollar costs, transaction costs, account charges, redemption fees, deferred sales charges. There are more than 17 total fees that can be stacked up all in that fine print.
TONY: Consider this, most plans are constructed by actively managed mutual funds, in other words, these are people, or funds, that are trying to beat the stock market, but in the last ten years, only four percent of all the 8,500 plus mutual funds have ever been able to beat the market and in any ten year period, it’s a different four percent. That means 96 percent of them failed, and if you look at the numbers over the last 15 years, it’s the same 96 percent. Different people, same ratio.
MIKE: So Ben, with all that said, what guidance do you have for our listeners at retirement radio, our Facebook listeners, all of our listeners all over, on how to avoid these unnecessary fees.
BEN: The best way to avoid fees is to know as much as you can before you move forward with whatever financial professional or investment that you have on the table. Unfortunately most of these investment managers do not beat the market. So think about that. You’ve got one in every 20 actively managed domestic funds, beating the index. So most of these guys aren’t even beating the market that they’re trying to benchmark against.
BEN: So why would you pay fees for this advice when it’s not even getting you returns that you can get on a no load fund. I feel very strongly that every individual should know exactly how much their professional is getting paid. Ultimately it’s your money that pays them. So figure out what it is, is it wrap fees, are there other fees associate with it, are they ongoing fees? Are they onetime fees? The more that you know, the easier it is for you to compare and to figure out exactly what is the best choices for you and your retirement assets.
BEN: This decision is far too important to take someone’s word on.
MIKE: Okay, but Ben financial professionals need to make a living somehow, but if they can’t beat the index, what’s the point? Is it worth just going to roboinvesting, I think Schwab and Fidelity, they got great programs for that. Just buy, hold the index for almost no fees, I think it’s like 14 basis points or something very, very low, or should they work with a financial professional and pay these fees?
BEN: Well that all depends on what you’re trying to achieve from your investment portfolio. If you want to go to a buy and hold strategy, where every seven or eight years, the value in those funds will drop by almost 50 percent, then yeah, go on a no load fee and just ride the waves. The issue is that in retirement, those crashes affect you a whole lot deeper. This was money that you need now for income. When you’re in your working years, you got time on your side, you can let the market crash and recover and it’s not going to be a big issue, as long as you stay with it.
BEN: In retirement, this money is needed for income. There are better approaches, there are safer approaches for you to draw your assets down in retirement, without taking so many needless risks.
MIKE: Okay, so Ben, and if I’m not mistaken, you and your clients, you-you all use a two sided model that’s meant to make money in up or down markets. But you do charge a fee, a management fee for that. As a purebred fiduciary, how can you claim that that is best for your clients?
BEN: You know, I get this question every once in a while, and it’s funny because my answer is always different from what people expect. My answer is my goal is not to lower your fees.
BEN: My goal is to maximize your after fee performance. So I know that that sounds contrary to what a lot of people believe. But as a fiduciary, my goal is to look after my clients financial health to make the decisions that are best for them. Now if I have a buy and hold strategy in the marketplace from the years 2000 to 2017, that average return per year is just north of five percent. Using the models that we use, two sided trend following models, that average return from that same timeframe is just north of 16 percent after all fees are taken out. So, let me ask you a question then.
BEN: Would you rather have a scenario where you get 5.6 percent return on a very low fee based vehicle, or would you rather get 16 percent after fee performance and pay a 1.3 percent fee on that. Most logical thinking people will say well I’m fine paying the fee if my performance is higher, and that’s our philosophy, is we are trying to give you the most return for your money, not the lowest fee. Now these models aren’t trading on exotic stocks, they’re not trading on high risk options, they’re trading on ETFs, exchange traded funds.
BEN: They’re trading on mutual funds that lower the amount of fees that you have. Again, our overall philosophy here is to give the highest rate of return performance. And to protect capital when the markets are going down. We ask a lot from these managers, which is why we’re so diligent in keeping this list up to date.
MIKE: Ben, thank you so much for your time, thank you so much for coming on the show, have a great rest of your weekend.
BEN: Thank you so much for having me, take care.
MIKE: All right, everyone, Ben Coval, and quick offer here for those just listening, just tuning in right now.
MIKE: If you want to talk to Ben about fees and you just, you need some help looking at your portfolio, you need some help figuring out if you’ve got fees and you just don’t know where to get started, him and his team over in Seattle and they do help people all over the nation, are happy to help for the next ten minutes, they’re going to open the phone lines, dial #250 right now, and say retirement help. You’re going to get my staff, right now, when you do that, I’m going to connect you to Ben and everyone that can help you. These are purebred fiduciary’s, they’re going to help you find the fees in your statements.
MIKE: They’re going to help you find all of these 12B1s, all th-this crap that’s holding you back from actual performance that you need. Okay, so dial #250 right now, say retirement help, we’re here for you. We’re here to get you the transparency you deserve, especially on fees. All right, must be 55 years or older, and have at least 300,000 of investable assets to qualify. We’re here to help retirees. Sorry if you’re in your 20s or 30s, we just specialize with retirement and we only have so much time to help people.
MIKE: That offer is for the next ten minutes though, #250, with the key work retirement help. All right, everyone, we’re going to get started with our next segment here, get ready for your market minute. [HORNS] All right, everyone, so there’s just so much going on with the markets right now, we had that huge drop just the other day, and the show is recorded on Thursday and so it’s going to be really tough to give you the most up to date knowledge for your market minute, right now. As things are just crazy, right.
MIKE: I love this headline I saw, market shaken not stirred. Oh isn’t that just great, but Fang, Facebook, Amazon, Apple and Netflix are definitely weighing heavily on the S&P right now, those technology stocks especially with Facebook and all that they’re going through right now, they seem to be the one weighing down the markets the most. But for this, your market minute today I kind of wanted to talk a little bit differently than usual about it. I wanted to talk about the seven to eight year market cycle, that typically happens, okay. For you retirees or near retirees, specifically the near retirees that want to retiree within the next eight years, listen up to this thought for your market minute, okay.
MIKE: If you’re buy and holding, right now, which means you just invest in the indexes or whatever you want, and that’s it. Okay, and the markets tank, you just pushed your retirement back years. That is something you just can’t afford. If you are working with someone that’s encouraging the buy and hold strategy, just think about this. You want to retire in five years, the market’s, let’s just say hypothetically, no one has a crystal ball, that the market’s take a 50 percent hit like in 2008.
MIKE: And it’s possible, no one knows. But it’s possible, how long is it going to take you just to get back to principle and then recover and get that last little bit that you need to retire. It just doesn’t make sense. I kind of feel like that guy from V from Vendetta, telling you something that most of the industry doesn’t want because that’s what the industry promotes. But you know what.
MALE: There are of course those who do not want us to speak.
MIKE: And I’m going to speak and I’m going to give you the transparency that you deserve. So with that being said, our next guest is just absolutely incredible. 32 years in the business, owns his own firm, owns Decker retirement planning, and is the author of the Decker approach. Now, if you have not picked up a copy of the Decker approach, you can get it on Amazon.
MIKE: It is incredible. It is, is definitely not a light read, it is full of details, diving into the details about retirement planning, and finding out really what’s the meat, what do you need to know and what questions should you be asking. I’m very excited, Brian Decker. Thank you so much welcome to the show.
BRIAN: Thanks, Mike, for having me.
MIKE: Now, Brian, historically speaking the markets tank every seven or eight years, right. And it’s been about nine to ten years since the last crash. Being 2008, I think we can consider being the last big crash. We could be due any time for another market correction, as they say in the media or in reality, a crash, right.
MIKE: Just a week ago, the nation watched the markets fall pretty harshly, there was a great deal of panic, and on whether or not this was going to be the next downturn or not, how did your clients react to what happened?
BRIAN: So Mike, last Thursday and Friday markets were down huge, and both days our clients made money. From February, from third week of January to the first week of February, markets lost ten percent and our clients were down 0.9 percent, less than one percent. I hope clients do have a downside protection strategy because we’re in year ten of a typically seven to eight year market cycle.
BRIAN: Let me give you some dates. So from 2008, October of ’07 to March of ’09, that period, the S&P lost 50 percent. From January 01 of 2000, actually from March of 2000 to March of 2003, the S&P was down 50 percent, so seven years before ’08, Twin Towers went down, that was in 2001, middle of a 50 percent three year drop in the market. Seven years before that, was 1994, Iraq had invaded Kuwait, the interest rate spiked, the economy was in recession and the market struggled.
BRIAN: Seven years before that was 1987, black Monday. 22 percent drop in a day, 30 percent drop peak to trough. Seven years before that was 1980, from ’80 to ’82, that was a 46 percent decline in the stock market. Seven years before that was ’73, ’74, that was a 42 percent drop. Seven years before that was the ’66, ’67 bear market, that was over a 40 percent drop and it keeps going. So I hope that people are ready.
BRIAN: It’s been since 2000, since March of 2009.
MIKE: All right, so Brian, why hasn’t the market then followed the typical seven or eight year market cycle?
BRIAN: One reason, and it’s quantitative easing. Quantitative easing has flooded the markets with cash that wouldn’t normally exist and it has extended this market cycle from typically seven or eight years, and it’s pushed it out. We are at extremely high valuations, where based on price earnings ratios, we’ve only had a trailing price earing’s ratio of 25 times or higher three times. 1929, 1999, and the third week of January in 2018.
BRIAN: So valuations are very high, and some of the canaries in the coal mine are starting to sing right now, for example, credit card delinquencies, this just came out, credit card delinquencies soared 5.3 percent across small banks, that’s the highest since the financial crisis. The major four banks saw their credit card losses surge 20 percent last year, year over year from 2016 to 2017. JP Morgan Chase Dan Pinto, CEO, he said that equity markets could fall in his opinion 40 percent in the next two or three years. His comments come as investors worry over the effects of central banks raising interest rates and rising inflation. So let me comment on this.
BRIAN: Mike, we’ve had two huge tailwinds for the markets in the last gosh, ten years. Declining interest rates, those are now a head wind, as interest rates are starting to go up, and we have quantitative easing that’s now starting to be what’s called tapering, tapering is the buyback of that debt. So what used to be tailwinds are now headwinds. Those are frontal headwinds, his comments worry about, well Pinto said he, he said it could be a deep correction, said Pinto, the banks co-president in an interview with Bloomberg Television on Thursday of two weeks ago.
BRIAN: He said the markets are nervous, Trump has already started to talk about tariffs and tariffs create uncertainty in the markets, because markets don’t know how to price the earnings of companies that may or may not be properly reflected right now. What happens if the company that you’re invested in is going to be part of tariffs and cut sales and also cut earnings.
BRIAN: Jamie Diamond, JP Morgan chief executive officer, echoed Pimco’s [PH] concerns about tariffs. Last year stocks routinely closed at the upper end of the trading ranges. But that’s now changed. Over the last several weeks, the S&P 500 has closed at the bottom half of its trading range every day for the last two weeks. The S&P 500 is within spitting distance of its 200 day moving average, which by the way, I just want to pause, if you don’t have any other plan than this, you should cut your equity exposure by 50 percent if you’re retired, if the S&P: 500 crashes through the 200 day moving average.
BRIAN: That if you have no other advice, could save you six figures in your, of your retirement assets. The idea that the federal reserve can pull the economic levers just so perfectly, gradually raising interest rates and slowly unwinding its quantitative easing program, and withdraw its unprecedented stimulus efforts without triggering recession, historically it’s very unlikely. According to the official record, the Fed has only pulled that feat off once, in history.
BRIAN: So that was with Allen Greenspan, when he doubled rates in 1994 without causing a recession. Though you could argue the burgeoning tech boom could have something to do with that. Every other tightening cycle has been followed predictably by an economic downturn. Nomura Securities suggests that while the tech sector as a whole is not overvalued, the FANG, which is Facebook, Apple, Netflix and Google are at extreme levels and by the way, Facebook is causing some huge market disruptions right now.
BRIAN: The biggest four stocks encompass about 25 percent of the NASDAQ capitalization. So when you have one of those big stocks, Amazon, Facebook, Google, when one of those stocks drops five, six, seven percent, it really has an effect on the NASDAQ 100 index. They have other ratios here that I’m looking at, Mike, that talk about same thing, market valuations being high, the fact that we’re late in the market cycle, I just want to end with this.
BRIAN: When we talk about the canary in the coal mine, what every peak is typically followed by, so if we take household net worth share of disposable income, we are now at 680 percent. The tech bubble peaked at 640, the no. The tech bubble peaked in 1999 at 600, in 2008 we peaked at 640. We are now at 680 on this. Household net worth as a percentage of disposable income, the higher the ratio, the more wealthy and confident you feel if you’re anywhere near average. Most aren’t of course.
BRIAN: But the net worth to income ratio is above where it was when it peaked in the two previous peaks. So, I hope that people have a plan.
MIKE: All right, so Brian, you’re talking about plans here, and you’re from Decker Retirement Planning, where you pride yourselves on two different things, one that you are all purebred fiduciaries, 65 licensed, no conflict of interest, and you’re a math based firm, what do you do for your clients.
BRIAN: Unlike the banks and brokers that have all of your money at risk and when I say all of it, I mean, all of your money is at risk with the banker, broker model. It’s an asset allocation pie chart, used for diversifying your investments among large/mid, small caps, growth, value, international emerging markets, you’ve got some cash, you’ve got some bond components, that makes no sense to us, it’s totally fine in your 20s, 30s and 40s. But when you use that, when you’re over 50 and keep all of your money at risk, that makes no sense.
BRIAN: Because markets crash every seven or eight years, and we are due, we’re beyond that. So you have no downside protection, you’re supposed to ride it out, and lose 30 or 40 percent of your funds, you’re supposed to wait four or five years to get your money back, and during that period you’re supposed to draw money, well let me tell you mathematically what your banker and broker’s telling you to do. You’re being advised to draw money out of a fluctuating account, which is financial suicide.
BRIAN: It’s where you draw income and compromise gains when the market’s go up, and you accentuate market losses when the markets go down. When you do that, you are committing financial suicide, so in contrast, what we do is we ladder principle guaranteed accounts that have averaged between six and seven percent in the last ten years, we average those, we draw monthly income out of those accounts for the first 20 years.
BRIAN: That means that for the first 20 years, markets can go up or down, interest rates can go up or down, economies can go up or down, and it does not affect our clients. Our clients have incredible peace of mind, the clients that used our planning in 2008 didn’t even have to change their travel plans because they didn’t lose any money in their principle guaranteed accounts. These accounts are designed to make money when the markets go up and you lose nothing when the markets go down.
BRIAN: So we ladder those principle guaranteed accounts, we carve out some money for your savings, checking, we call emergency cash, and then the money that we have set aside for risk is typically only about 25 percent. Why 25 percent? Because that money has 20 years or so to grow and during the time that it’s going to grow, we use, because we’re fiduciaries, and because we’re math based, we use two sided trend following algorithms, mathematical algorithms. That are designed to make money in up or down markets.
BRIAN: So of the six managers that we have and by the way, how do we get those? The two sided models um, have been the highest returning net of fee risk accounts that we can find. So if I’m a fiduciary to you, and you would expect me to go out and find the highest returning accounts that protect principle when the markets turn south, and that’s exactly what we’ve done.
MIKE: We use timer track, we use theta, we use the Wilshire Database, we use Morning Star. And we want to find out who has the highest returns net of fees. Because we’re an independent company, why, it doesn’t make any sense for us to use second or third rate mutual funds or money managers and we don’t. The six that we’re using, three of them have, are invested in the stock market. So they trade the S&P 500, long when the markets are trending up. And they make money as the markets go down.
BRIAN: It’s a two sided strategy, by the way, think of common sense, the markets a two sided market, it goes up and it goes down. Why wouldn’t you use a two sided strategy in a two sided market? Markets go up and down, why would you use a one sided strategy in a two sided market? So we don’t do that, we use a two sided strategy in a two sided market. Of the six managers that we have, five of them made money in 2008. Three of them are invested in the S&P 500 and the NASDAQ 100 index.
BRIAN: Of the three, two of the three made money in 2008 because they’re two sided strategies that trade based on market internals. What are market internals? Market internals, market externals are what the Dow, S&P and NASDAQ did today. Market internals are what uh, the advanced decline line is doing, is it pointing up, that would indicate strength, is it pointing down, that would be weakness.
BRIAN: Is the number of new highs going up, indicating strength or is it going down, indicating weakness. Is the number of new lows going up, indicating weakness or is it going down, indicating strength. Those are examples of market internals, and these computer trend following models will invest long the market, allowing you to make money as the markets go up, and then they protect principle as the markets go down. These are two sided trend following models. Why don’t you have these? These aren’t any secret of ours at Decker Retirement Planning.
BRIAN: These are available to anyone, and if I’m a fiduciary to my client, which we are, we go out and do the homework and we find out who’s got the best returning risk managers. And by the way, as I said, three of our managers are invested in S&P and the NASDAQ 100. What are the other three invested in? These are called non-correlated sectors, non-correlation means they go up when the markets go down. What sectors do that? Gold, silver, treasury bonds and oil, in 2008, all four of those sectors made money, when the markets got creamed.
BRIAN: So these sectors make money as the markets go down. So Mike, that’s how we do it. We have principle guaranteed accounts, that are generating monthly income, for the first 20 years of retirement, and then we have risk money invested in two sided models that further shrink the market risk, allowing our clients to make money in 2000, ’01, ’02 and 2008. By the way, just today the markets were down another 400 points. Three percent on the NASDAQ 100 index, we were able to make money today as well.
BRIAN: So, we’re long treasury bonds, we’re long gold and silver, and we have a short position on the NASDAQ 100 index, that’s been a hedge for us. So, Mike, that’s what we do at Decker retirement planning. In my opinion the most popular investment techniques of buying and holding are dangerous when you’re retired. Let me say it this way, I’ll close with this, when you take that last paycheck you’re ever going to take, and you-you trot off in retirement, you can’t afford any of these 30, 40 or 50 percent hits anymore.
BRIAN: I gave you an idea of using the 200 day moving average as a good helpful hint on how to protect your risk money if your banker, broker or advisor won’t do it for you. That will help you do it yourself. I hope that helps, thanks Mike.
MIKE: Brian, before we let you go, and thank you so much for your time being here with us today, do you have any last few comments, or things you want to say to our listeners at retirement radio?
BRIAN: I hope that they’re dealing with fiduciaries, Mike, I hope that they’re dealing with people who are using two sided trend following models, so that they don’t take these hits. The markets are now starting to get volatile, and that’s typically an indicator that we’re starting to roll over.
MIKE: [APPLAUSE] All right, Brian Decker everyone, thank you so much for tuning in. Real quick, now Brian and his team have extended a very generous offer. If you want to talk to him, and his team, in Salt Lake, in Washington, or soon to be California, in the San Francisco, the Bay area, you can dial #250 on your smart phone right now, and say Decker retirement.
MIKE: They are offering right now, for the next ten minutes, the lines are open, for them to offer a no cost visit to you, to come in and talk about your plan. To talk about how to prepare for the next market downturn. To prepare for whatever might happen. Draw income correctly, use these two sided models which Brian did not say, but they’ve averaged around 16 and a half percent since 2000. That’s incredible. #250 right now, say the keyword Decker retirement. Must be 55 years or older, and have at least 300,000 of investible assets to qualify. They’re there, they want to help you, that offer’s for the next ten minutes, dial #250 right now, Decker retirement.
MIKE: Everyone, it’s been such a great show, so much information, hope you enjoyed it, tune in next week, same time, same place, or if you catch us on the radio show, just subscribe via podcast, iTunes or Google Play, so you can catch at your convenience. And you don’t miss a beat. [APPLAUSE] Thanks so much, talk to you soon.
Decker Retirement Planning Inc. is a registered investment advisor in the state of Washington. Our investment advisors may not transact business in states unless appropriately registered or excluded or exempted from such registration. We are registered as an investment advisor in WA, ID, UT, CA, NV and TX. We can provide investment advisory services in these states and other states where we are exempted from registration.