Today I have Brian Williams of Northshire Consulting and we’re going to be talking about how financial advisors can help improve 401k plan access to the American people who are working at small businesses who currently do not offer them. Let’s talk about fixing the 401k coverage gap, people! What if the local baker had a 401k plan? The neighborhood laundry? The local trucking company? Small business retirement plans are the way to save the American middle class from retirement failure!

Why are small business owners not offering 401k plans?

According to Brian, about 40% of workers don’t have access to one to begin with.

Why?

It’s not a priority. The local bakery has 10 people working there, has turnover, has part time employees, and managing the day to day is the priority. The 401k plan is low down on the list.
There is also the perception that they are too complicated, too expensive, and that the business believes that they are too small to have a 401k plan.
Business owners don’t believe that works will actually do it.
Business owners want to plough money back into the business instead of taking a risk on the market.

How 401k plans are important societallyIf the 401k system was set up to accommodate the American middle class, it could make a major difference in people’s lives. It’s important to society that these mechanisms are in place.

What about the people who aren’t financially that literate, who wouldn’t go to Charles Schwab and open a brokerage account?
What about the truck driver who, between family and work, doesn’t have time to read NerdWallet?
What about those who aren’t financially successful enough to where they are invited to the RIA firm steak dinners, increasing their scope of understanding?
What about those who don’t have the money for a financial advisor?
What about those who aren’t teachers qualifying for a pension?

What about those people???? Should we just throw them off to Social Security and hope for the best?

A 401(k) is the only mechanism where many Americans can get some financial literacy. According to Brian, half the country doesn’t even have more than $2,000 in their savings account. The idea they are going to go out and hire a $10,000 a year planner is ludicrous.

The workplace offers the one to many model and is the best way to get financial wellness and literacy to these people.

How advisors should approach small businesses about starting up a 401k planAfter you inspire the business owner, then comes the typical conversation about fees, funds, and fiduciary – not before. Instead of trying to pitch lower fund fees or compliance, strike them in the heart.

“Business owner, do you care about your employees?”

Yes.

“Do you want them to stay with you a long time?”

Yes.

“Do you think it would be the best thing for your business if Sheila who answers the phone of the trucking company, and who all your clients know by name, if she were still there in five months from now?”

Yes.

“Does Sheila have a family?”

Yes, she’s got two young kids.

“Does she know about 529 plans?”

Huh? I dunno.

“Does she know about 401k?”

I dunno, I’ve never had a conversation with her.

Where advisors miss opportunities with small businessesThis is about motivating the employer to want to participate in the financial wellness of their employees. That would be the conversation not the typical financial advisor pitch about fund expense ratios. That’s not it. Show them ways they aren’t caring as much about their people as they possible could. This is how Brian approaches the conversation about small business retirement plans.

How do you think lethargic or non-motivated employees affect your bottom line?
Ask them who the plan is for; them or their employees.
How expensive is turnover for your business?
How much time do your employees spend thinking about money issues?

Especially at a small business, it’s a lot harder for people to put in half-effort, to look for another job, and to leave if they feel that the small business owner cares about them.

Bring the spirit of entrepreneurship back to the conversation. If you want to be a financial advisor for 401k plans, do it for the right reasons; not just to get at the business owner’s assets. You have to have a passion for working with all the employees because if you are just laser-focused on the CEO and have no concern for Tony the secretary who is out front putting away $20k a year, that is not going to be a win for anybody. It’s just not a good scenario; you really should have a passion to help everyone in that company’s workforce.

Brian says that what many advisors miss though is the automation. You don’t want to have the employer have to manually download payroll data every week; use technology to streamline the process and make it easier.

American middle class needs more 401k plans

Financial advisors have an amazing opportunity to help America.

Not have as stressful a Christmas
Not fight with their spouses over bills
To help them to get up in the morning and feel as if they are building something for their family rather than just getting a paycheck that is about to vanish
To feel they are more in control of life for their families
To seek people to acquire more financial literacy because you inspired them
To help people to seek more success financially instead of just clocking in and clocking out, to behave differently

Solving the 401k coverage gapBrian wonders:

What if ever advisors took every Friday afternoon and went to visit a small business in a 10 mile radius of their business?

Instead of writing a check to your local charity, donate some time. Even if your goal is to break even, maybe that is your contribution to your community instead of just writing a check. If you give a business owner five good things to do for their business, you never know how they could reciprocate back. Moreover you never know what you can learn from sitting down with somebody, especially a business owner who has been through some stuff. If anything you could make a new friend.

And that’s it for the show!

Sara’s upshotThanks for reading my blog about 401k tips for financial advisors.

I am an outsourced CMO for companies who need regular, full service marketing – blogging, social media posts, newsletters, etc.
I am an hourly consultant for those who just need one-time or recurring guidance
People hire me as a ghostwriter to write content for a project fee
I have a social media training program
I have a book about what to say on LinkedIn messenger

Join the Transparency Advisor MovementThe Transparent Advisor Movement’s mission is to promote ideals of clarity, modesty, integrity, dignity, and client advocacy in all aspects of financial advice, with a special focus on Advice Only, Flat Fee, and Hourly service models. There is a special emphasis on clear disclosure of services and their related fees.

The Transparency Movement is the future of the industry – we welcome anyone who believes in our values to join us.

Join our next Transparent Advisor virtual meetup.

These meetups are free and the goal is to learn from each other about how to grow and manage a transparent practice for the benefit of clients.

Even if you can not make the meetup, or even attend in its entirety, please register for the replay and to be notified of the next one. We meet on the second Wednesday of the month at 1 PM ET.

DisclaimerGrillo Investment Management, LLC does not guarantee any specific level of performance, the success of any strategy that Grillo Investment Management, LLC may use, or the success of any program.

Grillo Investment Management, LLC will strive to maintain current information however it may become out of date. Grillo Investment Management, LLC is under no obligation to advise users of subsequent changes to statements or information contained herein. There is no guarantee that the information contained herein is accurate. This information is general in nature; for specific advice applicable to your current situation please contact a consultant or advisor.

Rates may vary as a function of geographic location due to exchange rate differences, fees, surcharges, and other factors. These offers are limited to the services advertised in the promotions contained on this page. Additional services may be provided at an additional cost at rates that are subject to negotiation.

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In this podcast I talk with Broc Buckles of BC Brokerage about how to avoid falling for a bad life insurance pitch.

For those of you who are new to my blog, my name is Sara. I am a CFA® charterholder and financial advisor marketing consultant. I have a newsletter in which I talk about financial advisor lead generation topics which is best described as “fun and irreverent.”

Bad life insurance pitches are all over the place!If you are a financial advisor, your clients have probably been pitched bad life insurance. Learn:

What to look for in the illustration to know if it’s a bad pitch
How the life insurance should fit overall into your client’s financial plan
What happens if the life insurance isn’t a good fit for the client
How some insurance products are bad, just bad, and how to tell
“Plan before policy” according to Broc Buckles, and what that means

Enjoy the show!

Sara’s upshotThanks for reading my blog about how to tell if a life insurance pitch is bad.

I am an outsourced CMO for companies who need regular, full service marketing – blogging, social media posts, newsletters, etc.
I am an hourly consultant for those who just need one-time or recurring guidance
People hire me as a ghostwriter to write content for a project fee
I have a social media training program
I have a book about what to say on LinkedIn messenger

The Transparency Movement is the future of the industry – we welcome anyone who believes in our values to join us.

Join our next Transparent Advisor virtual meetup.

These meetups are free and the goal is to learn from each other about how to grow and manage a transparent practice for the benefit of clients.

Even if you can not make the meetup, or even attend in its entirety, please register for the replay and to be notified of the next one. We meet on the second Wednesday of the month at 1 PM ET.

The post How to tell a bad life insurance pitch appeared first on Sara Grillo.

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In this first episode of “Does my Marketing STINK?”, we’ll interview Chase Dapello of Westlake Private Wealth Management and answer the question of whether or not his marketing stinks.

If you’d like to be a guest on “Does my marketing STINK” and have you or your company’s marketing analyzed for free, send me a note below.

FIND OUT IF YOUR MARKETING STINKSFor those of you who are new to my blog, my name is Sara. I am a CFA® charterholder and financial advisor marketing consultant. I have a newsletter in which I talk about financial advisor lead generation topics which is best described as “fun and irreverent.”

And now – onto the show!

“They’re not going to like me if I go out there and say I’m a financial advisor for dentists.”If they like you and you have the skills they need, they will actually hire you no matter what your niche is.

If you are going to niche, you should go gung ho. That is the only way to do it. Otherwise you are going to exclude the people who don’t fit into that niche, but you wont have the magnetism to attract the people who do fall into it. If you are going to niche, then burrow yourself so far down into that niche that you are at the bottom of the Atlantic ocean. Where the earthquakes come from. So far down that you don’t even care, that it doesn’t even cross your mind that you might be losing business. That is the only way I have seen niches really work. See Avier Advisors for an example. They know Microsoft benefits as well as if not better than the HR people who work at the company.

Or you can specialize. Devin Carroll is a social security specialist. Andy Panko started a taxes in retirement Facebook group.

“It’s been difficult to leverage existing clients. I’ve been doing dinners, lunches and seminars for clients and encouraging them to bring people they know along and they can learn for free. It’s been difficult to get traction on it.”When you go through your client base and your immediate circle and hit the point of not having anyone else to go to, that is when you really have to get creative. These events where you ask clients to bring friends are awkward and everyone is worried about not being able to meet your expectations for becoming their client. This is a hard, hard, hard way to go because clients are going to guard their relationship with their friends, and their friends are going to be guarded. It’s a masked sales call.

We have to get what I call “the second wave.” How can I use my relationship with this client to open doors for me that might not directly lead to another person on the other side of the door, but will create a land of opportunity for me?

I’d suggest trying to build a community with these folks that would be more natural and focus on needs or interests they might have. If you work with film script writers, for example, find a way to help them with the inconsistencies of income they tend to face. I would get to know these writers and interview them. Instead of coming to them with a sales pitch, come to them as an advocate.

Take a longer term view. Incubate and advocate. Write up the interviews. “How did you get your first writing job? “Are you part of the writer’s guild? What are the benefits of that?” “What website has been most helpful for you getting gigs?” If you could be the conduit, be the person the writers come to for these answers, it takes away the cudgel of stiff-faced dinner seminars. Show them you will walk alongside them. It should be more like this. They may be focused on the three steps ahead of them, but you are focused on the broader view including 30 years from now when you are going to retire, and that is because I talk to script writers all day and for that reason I can see a broader picture that you can not.

“Oh well that’s too much work and I have a quota.”

If you need leads right away, you are simply going to just have to cold call and get rejected or buy leads (insert link). People are going to see that you are not into developing a relationship with them unless you sincerely can keep the long term in mind a build something – a system, a community. If you can not do that, just resort to transactional marketing means and that is going to be a hard way to go.

Not enough in the pipelineMarketing and blogs are nice, but you need a list. And if there aren’t enough people on the list, you need to get out there and knock on doors. Yeah I know. People hate it when I say that.

If you cold call a business, don’t treat the receptionist like they work for you. They are probably pretty close with the business owner, especially if it is a small business. If you make a good enough case with the admin, they may want to actually help you. Treat everyone with respect anyway. Treat everyone associated with the prospect as a valuable source of information.

Just say, “ I was researching this company and I know that taxes have just onge up in the local area. I just wanted to come in and do a seminar about how to do tax planning in XYZ County. Have you ever had anybody come in here and talk about something like that? As someone who knows the company really well, is there anything you think would have a higher success rate?”

Treating the gatekeeper cold will cause you to lose sales. And guess what – people do it to reporters, conference organizers, lots of people.

When a reporter contacts me, I act like I work for that person. I don’t act like they act for me and I deserve for them to pick me, or that I deserve their respect. I work to earn their respect. Don’t act like you expect them to turn over their beat, or their conference, to you. Put your motives aside and be humble. Treat them like your client and you are trying to increase their business success, no matter what their title or rank is.

Mass mailings with no overall strategyIf you are not getting leads from the mailers, stop doing it. They are expensive and you don’t have any way to track who is actually reading them. I would create a community and serve them with a digitized newsletter that you can track.

Has a boring, typical financial advisor LinkedIn page* Boring banner photo with company name, which means nothing to them * Boring title that says your title and the company name but doesn’t * Not building a community but instead using it as a broadcast tool. If you don’t build up a community around yourself on LinkedIn, you will get Spam messages. Postings should be made to serve your audience with answers they need. * Don’t put your birthday in your contact field. If that gets to the wrong person, it can be a compromise of private info. * Need Featured postings * About section – instead of a bland description, it should state your position of advocacy

See these blogs for LinkedIn tips for financial advisors.

There is also this LinkedIn message ebook and social media training program.

Sara’s UpshotThanks for watching, “Does my marketing stink”. If you’d like to be a guest on the show and find out if your marketing stinks, send me a note.

I am an outsourced CMO for companies who need regular, full service marketing – blogging, social media posts, newsletters, etc.
I am an hourly consultant for those who just need one-time or recurring guidance
People hire me as a ghostwriter to write content for a project fee
I have a social media training program
I have a book about what to say on LinkedIn messenger

Immersion2025 will be the second advice-only and flat fee financial advisor conference in our industry’s history.

When: Wednesday, March 12th – Thursday, March 13th, 2025

Where: Four Points by Sheraton Kansas City Airport, 11832 NW Plaza Circle, Kansas City, Missouri, 64153

Join the Immersion here!

I have a newsletter in which I talk about financial advisor lead generation topics which is best described as “fun and irreverent.” I hope you’ll join it!

The post “Worried I’ll exclude qualified clients if I niche down.” [Does my marketing STINK? Ep One] appeared first on Sara Grillo.

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In this podcast we interview Jamie Menges of PDS Planning, a multi-advisor flat fee RIA firm with $1.7BB in assets under management. You’ll hear the story of why they converted from AUM to flat fee, how it has bolstered the growth trajectory of the practice, how to convert your firm from AUM and achieve similar results, and more!

Flat fee firms are not all solo lifestyle practices! We’re about to refute this myth!!!

I am an irreverent and fun marketing consultant for financial advisors.We’ll discuss:

What was the trajectory in terms of being an AUM firm and making the switch to flat fees
Why they made the conversion
How they went about the process of switching into the flat fee model
How it impacted their growth as an RIA firm
What Jamie would tell an RIA firm that wants to start charging flat fees but is worried
What their clients think
How excited their team is to be part of a disruptive business model
The importance of making this conversion in a controlled manner
Putting clients’ interest first as a fiduciary when assessing contract scope of work

Why they made the switchPDS Planning had 10 employees and everyone at the organization was excited to be a part of this disruptive business model. Flat fees are not just for lifestyle solo financial advisor practices.

The original impetus was the brand value (flat fees being more transparent and logic) and also to gain clarity about how much revenue exactly they would be earning. They believed in it and felt that it would be a true differentiator. They love the transparency of the flat fee. They love being able to talk to their clients about the fee they are being charged in dollars and cents.

“When someone asks you ‘What are you paying your advisor,’ we don’t want you to answer like everyone else and go, ‘I don’t know. I think it’s about the industry standard. I think it’s maybe 1% or something.” – Jamie Menges

What they learnedThey learned they had to be very careful about how they price things in order to provide the best possible counsel to their clients while also allowing for career opportunities for the team. They went from having 10 people to 16 people today -and growing.

After they decided they were converting from AUM to flat fee, they had to define what the variables were that were going to drive the pricing model.

Is this client going to be serviced mostly by a lead or an associate advisor?
How much time will administrative roles play in this relationship?
Are we going to do investment management?
What areas of financial planning are we going to be providing?
Do they have outlier circumstances that are going to create a greater volume of work? (stock options, concentrated positions, unwinding insurance policies, are they going to retain another custodian than Schwab?)
Do they have family members in a younger generation that will need to be serviced?

If unforeseen things such as divorce or death happens, they manage through them. Their first thought is, how do we get a solution for client? In the longer term, there is a contract adjustment for change in scope that come up. To keep up with the cost of doing business, there is an annual adjustment to the client’s contract as a matter of course. They use the meeting with the client to right size the contract to the relationship for both expected and unexpected changes that happen.

Although it seems like an intimidating conversation, it gets easier over time.

How has it changed the RIA firm’s growth trajectory?They had 400 clients when they started their flat fee conversion in 2016. They now have 600 clients. Their average growth per year in terms of top line revenue growth (organic, no acquisitions) is 11-12% per year. They want to grow in a controlled manner and work-life balance for their team is important. They turn away alot of clients who don’t fit their profile.

What he would say to someone who says the flat fee model is not scalableIt’s not as easy to scale as an AUM firm. But at the end of the day, PDS Planning is a profitable business that employs 16 people and provides a high quality service to its clients. They have grown. Scaling can be done; it may be challenging to maintain a 35% profit margin as a flat fee firm. It can be done with acceptable profit margins.

Alot of advisors who balk at the flat fee model are looking at themselves relative to other firms. He says they should worry about taking care of what they need to take care of in their own entity. If it’s all about dollars and cents for the advisor, they should think about trying to marry their clients’ interests with their own.

How to make the AUM to flat fee conversion easierHaving their employees buy in and be excited about being a part of this disruptive business is a key thing. Mindset wise, they have figured out what they need to charge in order to serve the clients they like serving. They are now working with clients who have $2MM or above and are providing an incredible cost savings versus what the client would be paying an AUM advisor. They have gotten to the point of clearly recognizing what it takes for them to be successful for their clients while being able to provide employees with a fruitful place to work.

Menges says this can be done on a smaller scale for flat fee firms who want to work with smaller clients. There is no one RIA firm size that flat fees work for. You can start out as a flat fee firm, you can change over from AUM to flat fees, or you can find a way to somehow make it work if you are abiding by another business model. It’s possible if you are able to understand what you do for clients, what you need to charge them, and whether or not that is a true value for the client.

You have to:

Have a vision for what you want
Take intention steps to get what you
Have a sense of urgency in how you get it
Don’t be complacent – keep doing what makes you successful

When have people ever been punished for doing the right thing? If you do the right thing for your clients and employees, good things will happen.

Sara’s upshotThanks for reading my blog about how one RIA converted to flat fee from AUM.

I am an outsourced CMO for companies who need regular, full service marketing – blogging, social media posts, newsletters, etc.
I am an hourly consultant for those who just need one-time or recurring guidance
People hire me as a ghostwriter to write content for a project fee
I have a social media training program
I have a book about what to say on LinkedIn messenger

The Transparency Movement is the future of the industry – we welcome anyone who believes in our values to join us.

Join our next Transparent Advisor virtual meetup.

These meetups are free and the goal is to learn from each other about how to grow and manage a transparent practice for the benefit of clients.

Even if you can not make the meetup, or even attend in its entirety, please register for the replay and to be notified of the next one. We meet on the second Wednesday of the month at 1 PM ET.

The post This $1.7BB RIA firm converted from AUM to flat fee and never looked back! appeared first on Sara Grillo.

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Fire your therapist and do this instead.

The post How to overcome any fear appeared first on Sara Grillo.

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We do a crypto debate podcast every year. Here’s this year’s joust which got a leeetle bit rowdy as these financial advisors hash it out. Enjoy!

For those of you who are new to my blog/podcast, my name is Sara. I am a CFA® charterholder and I used to be a financial advisor. I have a newsletter in which I talk about financial advisor lead generation topics which is best described as “fun and irreverent.” So please subscribe!

Did you enjoy the crypto debate?Thanks for listening to this crypto debate. If you are finding this newsletter valuable, please feel free to support its production by making a $20 contribution via this PayPal link or via Zelle to sara@saragrillo.com.

I am an outsourced CMO for companies who need regular, full service marketing – blogging, social media posts, newsletters, etc.
I am an hourly consultant for those who just need one-time or recurring guidance
People hire me as a ghostwriter to write content for a project fee
I have a social media training program
I have a book about what to say on LinkedIn messenger

Just letting ya know, in case you need me at some point.

-Sara G

BiographiesScott Salaske

Scott Salaske is the founder and CEO of Firstmetric, a flat fee financial advisor firm in Troy, Michigan. Ever since the beginning of his 20+ year long career, Scott has pursued his mission of delivering high quality financial advice in a low cost and unbiased way.

Early on in his entrepreneurial journey, Scott saw firsthand the inherent flaws and conflicts of interest in the traditional sales and product driven approach, as several family members had lost a significant portion of their hard-earned life savings to high-cost, commission-based investment products and inappropriate advice.

It was at that point Scott thought there had to be a better way for investors to obtain unbiased advice and low-cost access to the financial markets. That lead him to start Quest Asset Management, with the novel idea of putting investor interests first as a fiduciary, which was practically unheard of at the time. The idea centered on the concepts of simplicity, keeping total investment costs and taxes extremely low and developing a custom investment plan for each client using low-cost asset class and index funds.

A few years later Scott merged Quest with another local investment advisory firm, Portfolio Solutions, that shared the same investment principles at that time. Several years after the combined merger, Scott went on to grow the combined firm from advising approximately $60 million in client investment assets under management to more than $1.4 billion. In early 2015, Scott sold his ownership interest in the firm. He started Firstmetric a few years later.

At Firstmetric, Scott continues his mission of delivering low cost, unbiased advice to clients. Along his journey he has been quoted in the following publications: The Wall Street Journal, Investor’s Business Daily, Kiplinger’s Retirement Report, TheStreet.com, Cheddar.TV, Crain’s Detroit Business and MarketWatch.com; among others.

James Giles

James Giles works as a Product Manager specializing in the Fintech and Crypto space. Most recently James worked with several seed and pre-seed startups at Nerd United, a venture studio, specializing in working with Crypto Startups to identify their early product market fit and work to get them into a functioning BETA. His focus was to identify real-world applications and utility to the crypto space in areas such as payments, health care, eCommerce, charitable giving, and sales.

James completed both his Undergraduate and Master of Science Degrees at the University of Utah in Business Management and Information Systems specializing in Product Management. Prior to moving into Product Management James spent over 6 years with Fidelity Investments in various wealth management and technical roles where he held his FINRA Series 7 and 63 licenses and Utah Resident Life and Health Insurance License.

In addition to his professional endeavors, he volunteers his time mentoring those who want to break into the field of Product Management and works with a number of student blockchain organizations to educate as many as possible about the future crypto will have as a technology.

James is the father of three energetic boys and 1 Bernadoodle: Oliver, Henry, William, and Louie; and husband to Anya Giles since 2017. They love to travel, bake, and swim.

Robert Wright

Robert Wright, CFP® serves as a Financial Planning Professional at Advocacy Wealth Management with over 10 years of experience in the financial planning and services industry. Robert works families who are victims of wrongful death or personal injury to provide comprehensive settlement plans.

Robert completed His Undergraduate Degree at The University of Utah in Economics and his Master of Science in Advanced Personal Financial Planning and a graduate Certificate in Financial Therapy at Kansas State University.

In addition to his formal Education Robert Wright holds his FINRA Series 7 and 66 licenses, is a CERTIFIED FINANCIAL PLANNER Professional and holds Georgia Resident Life and Health Insurance License.

Robert is also an Instructor of CFP® Coursework for the College of Financial Planning Online and on Campus at Kennesaw State University.

Robert is the father of three amazing children: Macie, Liam, and Charlotte; and husband to Priscila Moraes-Wright since 2012. He and his family love to travel, play baseball, swim and play at the Georgia lakes and Beaches.

Dr. Steven Lee

Dr. Steven Lee is a lecturer in the Finance, Real Estate, and Law department at California State Polytechnic University, Pomona, Previously, he worked as an adjunct professor at California Lutheran University, and an instructor at the University of California Riverside Extension. Lee holds a Ph.D. in Financial and Retirement Income Planning from The American College of Financial Services, where he was named the Sievert-Sternberg Doctoral Research Fellow, and is currently pursuing a Doctor of Criminal Justice degree from Northcentral University. He has presented papers at conferences on topics such as investment fraud, risk management, and retirement planning. Additionally, Lee has received numerous awards, including the Outstanding Instructor Award and Excellence in Online Teaching Award from the University of California Riverside Extension, Best Paper Award in Risk Management & Insurance at the CFP Board Academic Research Colloquium, and is a member and fellow of the Sigma Beta Delta International Honor Society in Business. Dr. Lee’s current research agenda includes investigating the impact of insurance licensing on financial advisor misconduct, analyzing the effect of external vs. internal work commitments on college student performance in hybrid and online learning environments, and examining risk profiles of U.S. transgender male and female investors.

Podcast transcription and summary may differ from original recording and Grillo Investment Management, LLC may not be held liable for such differences.

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Wow, this was a powerful interview with Dave Welty, a financial advisor who founded and developed what I would consider a well-managed RIA firm. Avier Advisors, based out of Bellevue, Washington, has nearly $800MM in AUM and almost 20 employees. Here are five things they’ve done differently at Avier, and why it’s helped them kick the competition’s butt.

I am an irreverent and fun marketing consultant for financial advisors. The high net worth wealth management firm model needs a CHANGE!When I say the words, “wealth management firm”, here’s what you probably picture, right?

A suffocating, top-heavy firm structure, in which the principal is in command of all goings-on at the company and is the primary contact for all client relationships.
Dry, boring blogs about unappealing financial advisor topics that offer little practical insight to the consumer
A vast control gap between the advisor and the rest of the staff
Lack of meaningful diversity
No identified successor or even potential for one
An overall feeling of stodginess and stuffiness
Little to no differentiation from one RIA firm to the next
Lack of inspiration and in fact an overall impression of boredom

Am I crazy or am I right? Now let’s look at a different picture.

A glimpse into a well-managed RIA firmAs you will hear in the podcast, Avier Advisors has been strategically formed by Dave Welty to be a totally different type of wealth management company.

Here are the five ways Dave has managed his RIA firm differently and it’s kicked butt.

1 Non-pyramid based company structureThe teams page says it all.

It says, “We are proud to have fostered a culture that values teamwork, collaboration, and integrity.” That is not just a tagline.

You don’t see Dave Welty’s picture and bio at the top as if he presides over all. In fact, he is positioned in the bottom of several rows. The bios are randomly placed on the page in a non-hierarchical way. This says it all – that everyone’s contribution is valued and like a true team everyone plays a part in the client’s success.

Wouldn’t you be excited about working somewhere like that? To be a client of a firm like that?

You can tell from their body language. People here look happy. Genuinely happy.

It shows a stark contrast to the top-heavy hierarchical way that most RIA firms are run, even the larger ones, where the founder or president is in control of everything. Nobody else seems to have any authority or say in anything meaningful that happens to the client. It squeezes the life out of the employees. This is not an ideal structure for employee satisfaction and the lack of motivation eventually will be known to clients.

2 Hired by talent and attitude based on real life interactions not by resumes and job boardsIt sounds counterintuitive but this has worked incredibly well for Avier.

Dave Welty met Lars Phillips, a partner and Lead Advisor, when he was selling t-shirts at a baseball game.
Nick Wright was shoveling mulch in Welty’s front yard when they two spoke and Dave decided to give him a shot at his RIA firm instead.

To quote Welty (12:53), “I guess my points is, you’ve got to keep an open mind. You’ve always got to be engaging with people, talking to people, networking with people.”

That’s right.

The job boards are a meat market where candidates are going to grind you down for salary and haggle you over the terms in the non-compete, then when they leave to start their own RIA firm, they’ll swipe half your clients anyways. The best way to attract wealth management talent in an intensely competitive job market?

(Frame 13:05)

“We created an environment at Avier where people want to be.”

Awesome.

Welty’ s suggestion? That other RIA firms should raise their game so that people want to be there. Word will get around.

3 Nurtured succession planIf you want employees to stick around, they have to feel like they belong to something, like they can take ownership of some aspect of their work. That is how you set employees up to stay committed to your clients.

Frame 6:24

“We’ve made a tremendous commitment to who we are and who we wanted to become. That’s on the marketing side. We’ve made that same commitment on the operational side of the business as well.”

Good for you, Avier.

This commitment has enabled the firm to grow, and it’s also allowed Welty to create an effective succession plan so that his firm can live on after one day were to decide to exit.

Succession is an epidemic problem for financial advisors. A lot of them wind up selling to awful RIA aggregator firms that are going to treat their clients badly. Welty knew he needed to be able to pass the torch. He treats his employees like owners. If they ask him a question about a client, he asks them back, “Well what would you do if you owned the firm?”

This way you get people to make decisions. Empower them, and then sit back and watch.

The result?

(Frame 10:01)

Welty is 63 with four young partners. He owns 50% of the RIA firm and they own the other 50%. They are transitioning over time. They are 31 to 37 years of age. He nurtured the succession process for about seven years.

BOOM there you go.

4 Effective niche marketingAny advisor can say they serve a particular niche. A lot of times this statement is made with no real substance or skill to back it up. The reality is that doing it right takes a ton of time and effort.

Avier Wealth focuses on tech employees – Microsoft, Intel, Amazon, etc. Check out their YouTube channel. There are in-depth videos going into granular levels of detail, and some has garnered tens of thousands of views. This has served them well, leading to a steady flow of new clients on a monthly basis.

Why the appeal?

Here is an example of the Microsoft page.

(4:48)

“It comes down to being an expert in people’s lives…I tell people all the time. I truly believe we know Microsoft benefits better than most any HR person at Microsoft. And that’s powerful to be able to say that.”

To get paid well you need to deliver well. Microsoft deferred compensation is complicated. Some people may downplay it, but it’s not simple when you dive down into the nuances and details of deferring and setting up the distribution strategy. They have done the work – they know the ins and outs and the nitty gritty. Unfortunately most advisors will not put in the effort to go this far, and that is why many financial advisors fail to market themselves effectively.

Many of you advisors complain about not being able to get clients from marketing and the reality is you deserve it. Look at what you have to say in terms of material, factual knowledge. Is it that valuable to the client or is what the next advisor saying even better? You have to compete and nobody is going to give you handouts. This is $10k a year. Stop whining and learn some things and be the best, know more about a particular topic than anyone else, and then you’ll see how people respond differently once you do that.

5 Multi-dimensional, energized company culture(Frame 13:20)

Avier’s team is described by Welty as:

Average age of 35
Highly credentialed staff
More women than men
All walks of life

That’s not by accident.

And here’s why it matters.

When people are looking around for a job at an RIA firm, they look at the Teams page and ask, can I see myself there? Create a team of people at your RIA firm that looks like how the world is. See employees as humans and as a part of the world around them – the world your clients live in. They aren’t just droids with a price tag attached. Actively make an effort to support diversity and a positive growth trajectory for the people at your company.

Sara’s upshotThanks for reading my blog about the RIA firm of the future. If you are finding this newsletter valuable, please feel free to support its production by making a $20 contribution via this PayPal link or via Zelle to sara@saragrillo.com.

I am an outsourced CMO for companies who need regular, full service marketing – blogging, social media posts, newsletters, etc.
I am an hourly consultant for those who just need one-time or recurring guidance
People hire me as a ghostwriter to write content for a project fee
I have a social media training program
I have a book about what to say on LinkedIn messenger

Just letting ya know, in case you need me at some point.

-Sara G

Avier Wealth Advisors is not currently a client of Sara Grillo in any way at the time of publishing of this material. However, the past, the firm and some of its members have been clients of Sara Grillo.

The post 5 reasons this RIA firm is kicking your butt appeared first on Sara Grillo.

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The math behind Universal Life Insurance Interest Rates is a twisted web and most consumers are deceived. Know how the math works so you can see the potential risks that may exist with your policy.

But before we get into it…

Look, there are alot of schmucks out there hawking crap products disguised as financial advice.

Don’t be fooled!

Please subscribe to my newsletter to receive updates that raise awareness of consumer financial issues. It will teach you how to avoid shenanigans, crap products, and other scummy practices that are unfortunately common in financial advice.

I wrote a bunch of consumer advocacy blogs here to protect people from all the BS.

Blunt, unfiltered truth about Universal Life

Get an in-force illustration when you buy UL

Hidden costs in an insurance illustration – how to crack the code

The math around Universal Life Insurance interest rates is not that straightforwardAccording to our podcast guest Elan Moas, the investment assumption of the three primary cash value universal life insurance policies (UL, VUL, IUL) displays a hypothetical illustration of what MIGHT occur with the policy. It is based on zero ($0.00) cash value guarantees.

Here’s the danger of relying on illustrations based upon unrealistic Universal Life Insurance interest rate assumptions.

Universal life (UL=money market investment) policies from the late 1980s to the early 2000s were illustrated using 8%+ CD-like rates of return forever. Money market rates crashed to zero (0%) in 2022 due to Covid-19.
Variable universal life (VUL=mutual funds) were/are illustrated using an 8%-12% CD-like ROR eternally. That is a mathematical impossibility.
Indexed universal life (IUL=something like the SP500 index) but WITHOUT dividends and their reinvestment. There is no securities license required to sell it.

The interest rate assumptions for Indexed Universal Life require extra explanation. Actuarial Guideline 49 of 2015, via the National Association of Insurance Commissioners (NAIC) sought to cap, or limit the highly unlikely, aggressive illustrations used in the sales software prior to 2015. This correction was updated in 2020 with AG 49A and again in May 2023 with AG49B. This means the policyholder was likely shown an illustrated rate of return regulators have now deemed to be wrong and/or incorrect.

All three policies likely heavily underperformed the original illustration. Lower future cash value means your internal costs are higher and the policy is more likely to “lapse” or cease to exist while you the policyholder is still alive. This defeats the notion that these are permanent policies.

What to do if you own a policy?Order yourself an “in force illustration” which is the current policy projection and one that your insurer is not required to send you, unless you request it. Most policyholders have no idea this report exists.

If it still looks ok, congrats, you are one of the lucky ones. But this might be less than 5% of policyholders. Being on the wrong side of compound interest rates in universal life policies is a problem for the policyholder.

On UL and IUL use current rates, VUL use a 5% & 6% rate of return.
Request an internal cost report that shows all the internal costs eroding your cash value.
Request an additional report paying only until age 70, since in retirement you are on a fixed budget and do not want outgoing payments.

Are you disturbed yet?Let me leave you with this:

1

If you have any questions, send me a note. I am sick of consumers getting a raw deal and would be happy to hear your questions.

2

I have a newsletter entirely devoted to advocacy for the consumer. The goal is to educate people so they can steer clear of the traps the financial services industry sets for them. Please subscribe to my newsletter to receive these updates so you can avoid being taken advantage of by shenanigans.

These are topics I’ve written about in the past:

Blunt, unfiltered truth about Indexed Universal Life

How to CRACK the secret costs in an insurance illustration

Direct indexing sucks

Top advisor lists are bullcrap

How to read an ADV

3

Be safe!

-Sara G

Elan Moas

Elan Moas, the owner of Moas Consulting, a firm specializing in life insurance strategies, is a 4X SEC whistleblower and author of the book, “Lapsed, The Universal Life Insurance Whistleblower.” This is an expose of the entire universal life insurance industry and his decade-long research project to save millions of consumers and their lapsing policies makes him one of our country’s most important and ethical whistleblowers.

Disclosures

Grillo Investment Management, LLC does not guarantee any specific level of performance, the success of any strategy that Grillo Investment Management, LLC may use or mention in any of its content, or the success of any program it may mention in any of its content. Grillo Investment Management, LLC will strive to maintain current information however it may become out of date. Grillo Investment Management, LLC is under no obligation to advise users of subsequent changes to statements or information contained herein. This information is general in nature; for specific advice applicable to your current situation please contact a consultant or advisor. I want to be clear that nothing in this podcast or blog can be interpreted as an investment recommendation of any type, or an endorsement of any particular person or their services. The opinions expressed herein do not necessarily represent the views of Sara Grillo or Grillo Investment Management, LLC. Also, nothing in this podcast or blog can be interpreted as legal or compliance advice. For advise on such matters, contact a legal or compliance advisor. Any similarities to persons deceased or alive are entirely coincidental.

The post Don’t be tricked by 8% eternal Universal Life Insurance Interest Rates! appeared first on Sara Grillo.

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The regulators don’t force insurance companies to provide in-force illustrations to their Universal Life policy holders and it allows them to deceive consumers who aren’t prepared to do the math required to know the truth.

Insurance companies make Bernie Madoff look like a petty thief. Don’t fall for it!

But before we get into it…

Look, there are alot of schmucks out there hawking crap products disguised as financial advice.

Don’t be fooled!

I wrote a bunch of consumer advocacy blogs here to protect people from all the BS.

What’s a policy lapse?Higher future costs liquidate the cash value until zero and the policy ceases to exist. All your Premiums, Cash Value and Death benefit are kept by the insurer, despite making all your payments. That’s financial devastation.

Why is it so urgent for the universal life policyholder to order an in-force illustration? Why is there a problem?It’s simple. The original investment ROR shown to the consumer was higher than a rational and/or ethical advisor would use. This high hypothetical ROR makes the policy looks good at the point of sale, lower actual investment returns could show a future lapse. There won’t be enough actual cash value to pay for massive rising internal costs.

The urgency is to know if your policy will lapse or crash in the future. You want to know about this ASAP, so you can address this problem immediately. This is your money and your problem is not going away.

Is that what the in-force illustration tells you?Yes. The in-force illustration is the current forecast The annual statement only shows the current policy values on that day, not the forecast.

What’s wrong with relying on investment hypotheticals in a Universal Life insurance policy illustration?For instance, take Universal Life policies (ULs) invested in money markets in 1980s. The early 2000s shows 8%+ROR, interest rates went to 0% in 2022. Underperformed the illustration by 4%. That’s trouble. IUL/VUL have the same investment hypothetical problem.

So, there is no In Force Illustration law?No. The insurer isn’t required to send one to you on annual basis, only if you ask for it. I think > 99% of policyholders don’t know this report exists. The regulators have failed the consumer. We need a law mandating each policyholder receive this report on an annual basis.

Let me leave you with this:

1

If you have any questions, send me a note. I am sick of consumers getting a raw deal and would be happy to hear your questions.

2

These are topics I’ve written about in the past:

Blunt, unfiltered truth about Indexed Universal Life

How to CRACK the secret costs in an insurance illustration

Direct indexing sucks

Top advisor lists are bullcrap

How to read an ADV

3

Be safe!

-Sara G

Disclosures

The post Get an in-force illustration whenever you buy a Universal Life insurance policy! appeared first on Sara Grillo.

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Everybody talks about getting referrals from clients, but nobody really talks about what to do when they go south. What if the client doesn’t actually make the referral? What if the referral doesn’t call you back? I’ve got Bill Cates here and he’s going to discuss all of this and more as covered in his book, “The Language of Referrals.”

I am an irreverent and fun marketing consultant for financial advisorsClient referral tipsThere were some great takeaways here. We covered the main points from Bill’s book and there were some powerful takeaways about:

The words to say when asking for a referral without begging or being pushy
How to be more “referable”
How to plant seeds and trigger introductions
The value discussion – how to have it

Enjoy the show!

Sara’s upshotAre you ready to go leave the AUM fee model for hourly, flat, or advice only planning?

Learn what to say to prospects on social media messenger apps without sounding like a washing machine salesperson. This e-book contains 47 financial advisor LinkedIn messages, sequences, and scripts, and they are all two sentences or less.

You could also consider this LinkedIn training program which teaches financial advisors how to get new clients and leads from LinkedIn.

Thanks for reading. If you are a financial advisor reading this, I hope you’ll at least join my weekly newsletter about financial advisor lead generation.

See you in the next one!

-Sara G

About Bill CatesBill Cates is widely recognized as one of the foremost experts in the art and science of acquiring new clients
through referrals and personal introductions. Bill is president of Referral Coach International, founder of The Cates Academy for Relationship Marketing, and the host of the podcast TopAdvisorPodcast.com. Bill was recently rated as the #1 Financial Advisor Influencer by Indigo Marketing.
Bill is also a bestselling author. His books are, Get More Referrals Now, Don’t Keep Me a Secret, Beyond Referrals, Radical Relevance, and his latest book is The Language of Referrals.

Disclosures

Grillo Investment Management, LLC does not guarantee any specific level of performance, the success of any strategy that Grillo Investment Management, LLC may use, or the success of any program. Nothing in these materials may be construed as an investment, insurance, or financial recommendation. For such a recommendation, consult with a financial advisor.

Grillo Investment Management, LLC will strive to maintain current information however it may become out of date. Grillo Investment Management, LLC is under no obligation to advise users of subsequent changes to statements or information contained herein. This information is general in nature; for specific advice applicable to your current situation please contact a consultant or advisor. Opinions stated by third parties may not be correct and do not reflect the views of Grillo Investment Management, LLC. Grillo Investment Management, LLC may not be held accountable for any statements made by third parties.

The post Do this to avoid messing up a client referral appeared first on Sara Grillo.

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Yes, there is life after AUM fees! In this podcast I interview Sarah Charles, an hourly financial planner who used to work under the AUM fee model. She talks about why she made the jump and what life is like now as an hourly financial planner.

I am an irreverent and fun marketing consultant for financial advisors.The AUM fee model has its drawbacks when it comes to financial planningLook, let’s face it.

AUM fees are probably not the most logical way to charge when the focus on your services is financial planning.

WHAT how dare you, Sara?

Well logically it just doesn’t make sense. AUM is correlated with someone’s assets and that may or may not have anything to do with the person’s financial goals and the depths you need to go to create planning for them.

I feel like I am on the quest for the Holy Grail trying to talk to people about hourly planning.

Everybody gets an attitude problem when I talk to them about hourly planning. People give crazy responses and launch into a whole Shakespearean sonnet about how it doesn’t as well as the AUM fee model. Well, guess what. Sarah Charles is an hourly financial planner and she loves operating this way. So let’s talk about how she makes it work for her.

In this podcast you’ll learn:

How she charges as an hourly planner
What her service offering looks like
How she started her practice
The benefits of hourly planning vs. AUM fee models
What the challenges are if you are not charging AUM fees

Enjoy the show!

Sara’s upshotAre you ready to go leave the AUM fee model for hourly, flat, or advice only planning?

You could also consider this LinkedIn training program which teaches financial advisors how to get new clients and leads from LinkedIn.

Thanks for reading. If you are a financial advisor reading this, I hope you’ll at least join my weekly newsletter about financial advisor lead generation.

See you in the next one!

-Sara G

Disclosures

Grillo Investment Management, LLC will strive to maintain current information however it may become out of date. Grillo Investment Management, LLC is under no obligation to advise users of subsequent changes to statements or information contained herein. This information is general in nature; for specific advice applicable to your current situation please contact a consultant or advisor. Opinions stated by third parties may not be correct and do not reflect the views of Grillo Investment Management, LLC. Grillo Investment Management, LLC may not be held accountable for any statements made by third parties.

The post Life after the AUM fee model: converting to hourly appeared first on Sara Grillo.

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Stop wasting money on fancy “spaghetti tech”. The fintechs just want you financial advisors’ credit cards. Listen to Sara Grillo & Eric Negron on today’s Daily Truth Bomb as they break it all down!

In this podcast, you’ll learn:

1)How to ditch the overcomplicated workflows and embrace simple, effective processes. ??

2)Why free resources like YouTube can be your secret weapon for mastering any tech.

3)The $20 investment that could transform your financial advisor practice.

4) How to avoid getting locked into expensive, useless fintech contracts.

Transcript
Like early 40s types. Like, I think those financial advisors are probably a little bit better with the technology because they’ve had to because they’ve kind of grown up with it.

I don’t know. Here’s the other thing that really, this is the one that makes it. That really cracks me up.

Right.

We’re going to pivot on this is workflows. Everybody’s talking about workflow this and workflow that and automation this. Please don’t buy all the high, make it easier. It’s as simple as create a simple task that explains what needs to be done. You could even insert one of these videos like we talked about in, right there with the link, and then literally you can replicate it every time. It’s the account opening process, the Roth contribution process, the send money to the client process, and who needs a 20 step workflow when you can literally give somebody the task and give them the video and be done with it. So I think advisors overcomplicate it, and there’s a lot of fintech companies coming into the space that are just milking advisors, selling them stuff, and it’s overkill. What do you think about that?

What do you think about workflows and all this stuff?

Yeah, I agree with you. I think it could be much simpler, but I think it’s probably that the advisors, a lot of times don’t even know the workflows, those, that have teams under them. And I think that you know what it is, too? I think they’re not standard workflows. Like, I know one guy that there was someone with him for 20 years, and she was doing postit notes like, he couldn’t even get her to use her computer. There’s a lot of technology fear. That’s what I think.

Yeah, I think a lot of times advisors go out, they buy tech, spending thousands of dollars on this tech, and don’t even take any time to do training on the tech to understand its full capabilities. And they definitely don’t take it the next step, if they have a team and train them and then educate them about, like, hey, this is how we’re going to do this as an organization. They take what I refer to as the spaghetti approach to tech. I’m going to just get some and splatter some here and splatter some there. And I’m going to be honest with you.

All these fintech companies that are coming into the advisor space, they are ready to lock you in with a three year contract and take your credit card to sell you a bunch of spaghetti tech that you have no idea whether or not there’s any sauce or meatballs in that bad boy.

Yeah, I agree with you. I think from what I’ve seen, I mean, I focus on LinkedIn, and I just see that I would say less than half the people I deal with actually know how to use LinkedIn.

Ain’t that the truth.

But it’s just the idea of, I think, the novelty of it. But then I don’t know why there’s not a little bit more willingness. See, because then I think it just goes back to like, they’re already getting their 1%, it’s annuitized revenue stream that money is coming in and they don’t have to dance too much. So what do you mean? I got to learn this technology? What do you mean? I got to do this tutorial. Like, it would be the easiest thing in the world. Go to Google. Most of the support materials for these software programs are googleable. Yeah, we just made up a word.

Yeah, I like it. Googleable. So words. We’ve been that googleable. Here’s the other thing. I think you said advisors are lazy. I’m going to tell you another one. A lot of advisors I know are cheap. They don’t want to spend money on themselves, their practice, their systems, their tech. Here is the most valuable $20. I think any advisor person anybody listens to this should spend. Spend $20 for a subscription to YouTube Premium. I cannot tell you how invaluable this is. You can literally go to YouTube University. I have whole playlists of watch later. And when you have premium, you can download and watch it off the Internet. So if you’re traveling, you can close the app and still listen to it like a podcast. It is a game changer.

I can’t tell you how many YouTube videos I’ve watched to educate myself on tech that I have or tools that I have. I mean, even down to how the hell to use my gmail email better, and little hacks that I didn’t even know about.

I’m always googling. I don’t know how Gmail works. I could do basic stuff, but then I had to change my name. That pops up when somebody gets an email from me, and I was like, lost. Because some of this stuff is not intuitive, right?

100% agree with you. I mean, if you’re not using that as a technology and making that $20 a month investment, I don’t know what to tell you. You’re really doing yourself a disservice. You can literally make yourself more efficient make more money and create less stress for yourself with $20 a month?

No, but they’re lazy. Like a lot of them. Don’t want to do that.

The post The fintechs just want your credit card… appeared first on Sara Grillo.

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Beyond kindness: building trust and avoiding pitfalls in financial advising! Join Eric Negron & Sara Grillo in this podcast and discover the essential qualities for success in building clients relationships that last!

You’ll learn:

Why kindness is just the beginning for building lasting client relationships.

The 5 C’s of success every advisor needs to know.

How to avoid common pitfalls like “reverse churning” and inconsistent service.

Practical strategies for demonstrating value and protecting yourself and your clients.

Don’t miss out on this valuable discussion! Listen and learn how to start building trust and a thriving practice!

The post It takes more than kindness to build lasting client relationships! appeared first on Sara Grillo.

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Forget the “sizzle” and be real! Listen to this podcast and discover the power of authentic communication in financial advising!

You’ll learn:

Why shortcuts don’t work and how consistency is key to success.

How to prioritize client needs and communicate authentically.

The surprising benefits of being yourself and building genuine connections with clients.

How to find the balance between professionalism and your unique personality.

Don’t miss out on this valuable discussion! Click below to watch the full video and start building stronger client relationships through authenticity!

The post How to stop sounding fake in your marketing – authentic voices win! appeared first on Sara Grillo.

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Stop struggling with content creation! Your clients are giving you gold, but are you missing it?

In this podcast you’ll learn how to turn client conversations into engaging content!

How to mine valuable nuggets from your client interactions.

Real-life examples of transforming client experiences into compelling content.

Why listening to your clients is the key to unlocking powerful marketing opportunities.

How to ditch the jargon and connect with your audience on a human level.

Don’t miss out on these valuable insights! Click below to watch the full discussion and start creating content that resonates with your audience!

The post Easy ways to create content that prospects and clients will love! appeared first on Sara Grillo.

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Are you doing business with the wrong type of client? Join Sara Grillo & Eric Negron and discover how to turn your existing client base into a goldmine of referrals!

In this show, you’ll learn:

?How to identify your ideal client and re-engage your current ones.

?The 3 powerful questions to ask that unlock hidden referral opportunities within your existing network. ?

?Why consistent communication is key to building stronger client relationships (and getting more referrals!).

?Strategies to overcome distractions and deliver value that resonates with your clients.

Don’t miss out on these valuable insights! Click to listen to the full discussion and start attracting your ideal clients today!
_________________________
Hosts: Sara Grillo & Eric Negron

Topic: Re-Engaging Existing Clients for Referrals & Growth

Timestamps:
(0:00) Intro & Welcome
(1:00) Case Study: Advisor with 400 Unideal Clients & Desire for New Clientele
(2:20) Eric’s View: Identifying Ideal Clients & Utilizing Existing Network
(3:40) Sarah’s Doubt: Difficulty Finding Referrals Among 400 Unengaged Clients
(4:20) Eric’s 3-Question Strategy for Deep Client Conversations:
Future Goals & Collaboration: “What would make our collaboration successful for you?”
Current Value Perception: “What aspects of our work do you find most valuable?”
Referral Opportunities: “Is there anyone you know who might benefit from these services?”
(5:20) Sarah’s Concerns Regarding Open-Ended Questions & Distractions
(6:40) Eric’s Emphasis: Repetition, Value Delivery, & Consistent Communication
(7:40) Sarah’s Agreement: Rethinking the Value Proposition for Existing Clients
(8:20) Conclusion: Unearthing Hidden Potential & Building Stronger Relationships

Key Takeaways:
?Re-engaging existing clients can be a valuable source of referrals and new business.

?Identifying your ideal client profile helps tailor communication and identify potential referrals.

?Deep, value-driven conversations can uncover client needs and referral opportunities.

?Repetition, consistent communication, and a compelling value proposition are crucial for client engagement.

Actionable Tips:
?Review your existing client base and identify potential fit with your ideal client profile.

?Schedule dedicated conversations with clients, focusing on their goals and experiences.

?Ask strategic questions to understand client values and identify potential referral networks.

?Consistently communicate value, demonstrate expertise, and build stronger client relationships.

Transcript:
Who? Okay, here’s a good one.

I got an interesting question today.

Yeah.

I’m talking to this advisor, and he.

Says, I got 400 clients, but they’re not the kind of client that I want in the future. It was the people from 15 years ago when I started out selling insurance policies or a share mutual funds. And now I’m looking for Aum, and I’m looking for the doctors and the business owners. Now, but before, it was, like, you.

Mean basically when they started out, before they were on that doctor plan, basically, if you had bones in an x ray, they’d talk to you.

Right, okay, exactly. They would do business with anybody. Right.

They basically are a collector, a museum. They collect things, collecting different kinds.

Guys got, like, 400 clients, right?

Okay.

And he’s like, I want to market, but I can’t get referrals from these clients because they’re Joe from the block. It’s not like the business owner with 50 employees that lives in the hoity toity part of town, right?

Yes.

And he’s like, moreover, I don’t have time to be writing content, which I have to give it to him, because I hate it when advisors get kind of roped into that. I see this all the time, that they think they can write blogs, but they really just end up not having the time to do it. They get writers blocked. They get busy, and then it’s like, this whole waste of money. And it’s like, I hate doing business with clients like that. So, everybody, if you’re listening to me, don’t be dishonest with yourself about what your limitations are in marketing. So that I have to give to him, right?

Yeah.

What would you say to this guy? He wants to get new clients, but he’s got these 400 clients that he.

Doesn’T have a good base for referrals.

Yes.

First thing I would say to this guy is like, who is it that you want to serve?

Right.

What type of clients, and what would perfect look like to you?

Great.

Whatever that is. Maybe you want to work with executives that are empty nesters, and you want to work with business owners that have under ten employees, and that’s who you want to work with.

Great.

All right, let’s say it was business owners, right?

Okay.

Let’s say it’s business owners. First thing I would do is listen. I would start with what I got before I go get anything else. I would go through this 400 clients and do, like, a review of them. Like, which of these people is their opportunity for me to go and see if there’s something within there that I could do more with and that I could gauge on a different level that I could offer some more value. I’d start there and see if they could introduce me to business owners. If you don’t have that, okay, so let’s say the 400. There’s nobody there, but you got to keep that.

Hold on, bro.

Hold on.

Is that a load of bs that.

He says that, no, there’s nobody because.

I don’t know who these 400 people are.

How do you do business with 400 people that you can’t go back to them and then say, hey, do you value and appreciate my service?

400 people, and no one in those 400 knows anybody rich?

Yeah, I find it really hard. That’s a lot. 400 clients is a lot. So this tells me that one, this particular client, this particular advisor or prospective client, he doesn’t have any process to.

Go deep with these people because the.

Reality of it is, listen, just let me loose on those 400 clients and I’m going to have 400 conversations and I’m going to ask. Here’s what I’m going to ask. I’m going to ask three questions. Here’s question number one. Mr. And Mrs. Client, if were sitting back three years from now looking at your finances, your planning, and the things that are going on in your life, if were sitting back looking at it, what are the things that we need to do together so that you feel like it was the best use of our time working together professionally and then shut up. Let them tell you. They’re going to tell you exactly what they want. Cool. Then you’re going to ask a follow up question. Currently, what are the things that we.

If assuming you have a we, if it’s just a you, what are the things that I am doing for you that you find most valuable? They’re going to tell you.

Great.

Now you can ask a follow up question that goes like this. Is there anybody that you know right now that you think could benefit from those things that you found most valuable? That is just kind of positioning it. And then the follow up is. And I’ll be quiet. You can chime in. The follow up is, I want to let you know that I will always make time to talk to people that you care about if you think I can help them, and then be quiet. Those three framing questions and then that positioning, there’s no way you won’t get more opportunities out of 400 clients. You know, what the hell to do with.

The third question is weird because I.

Feel like it’s too open ended, like, right now. Eric, what would you do if I came to you and, Eric, you know, you read my daily. I. I know a lot about LinkedIn marketing. Who in your network would need help with their LinkedIn? You’d be like, I don’t know. And then the demons start to come into your mind of like, oh, I got to think about this right now. Oh, my gosh. My kid. Did I forget to pack ham and my kid’s sandwich today for lunch?

Yeah, it’s not an actionable car.

You know what I’m saying? The distractions and the interference, like, right. They try to cut.

But that’s why, to me, you’re right. Right. It’s not an easy question to be immediately. And that why, to me, this needs to be done in repetition. So, the reality is, what’s going on with our clients is we are all fighting weapons of mass distraction, which are these devices. We’re competing with Netflix and Amazon and Facebook and whatever the hell else is. The Kardashians. Yeah. We cannot keep up with them.

Okay.

So the reality of it is that’s why you got to have repetition, and you better say something that’s interesting. So if you got 400 clients, you better be having a conversation with them. You better be seeing you can deliver value, and you better be doing it consistently. So I agree with you. I find it hard to believe that there’s not gold in 400 clients somewhere.

I agree totally.

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Yeah, the title basically says it all. He’s taking the world by storm as an hourly financial planner, not managing any assets but simply giving out powerful financial planning guidance that clients love. Today we’ll hear from Kevin Estes of Scaled Finance as he talks about how he made it work.

But first…

For those of you who are new to my blog, my name is Sara. I am a CFA® charterholder and financial advisor marketing consultant. I have a newsletter in which I send you one actionable, practical marketing tip a day. Please sign up here!

I am an irreverent and fun marketing consultant for financial advisors.Why he chose to become an hourly plannerKevin noticed that there is usually more time spent in the early years in a client relationship. Yet under the AUM model, fees increase over time as the client’s portfolio grows. It seemed illogical to him that a client should pay higher fees for less time.

He figured out it would be better to invest more time initially to get people’s finances on the rails, and then adjust the amount downwards as the relationship progresses. His intent was to slowly trend down as time goes on and there is less to do for them.

Okay, let me just say that again.

He has the intention of charging his clients less, not more.

He is trying to minimize, in other words, the amount of fees he takes for his work.

Humility?

That is an understatement.

Kevin is also an advice-only planner. He doesn’t touch investments because he sees less opportunity to add value. He finds that alot of people prefer to manage their investments themselves, just with a little guidance from him.

His goal is to simplify, not complexify, things for his clients. This differs vastly from other advisors, who create complexity for the purpose of job security.

How does he get new clients?He works with T-Mobile employees and their families, but he finds that alot of people reaching out do not fall into this category. He posts on LinkedIn and messages people and clients come to him.

What he sees as the challenges with being an hourly plannerAccording to Kevin, relationships take a long time to set up (creating the roadmap documents) and that time is not billable. Being a fiduciary, he can’t just run people through a cookie cutter model. He wants the process to be customized to what the client really needs.

Hourly planning is arguably the most transparent way to bill for your time, and this is why many advisors avoid it. Kevin says that it doesn’t have to be prohibitive. He tracks how all his time is spent on each relationship and he communicates clearly so that clients know what is going on at every point. He rarely gets questions on bills.

There is a safety that advisors perceive with the 1% model. That is because there is some opacity there. Kevin has thrust this aside and succeeded as an hourly financial planner based upon the strength of his logic, fairness, and commitment to the client. He says that as a fiduciary, his job is to return back multiples of the value of each dollar they spend on him. If he doesn’t, he feels he isn’t doing his fiduciary duty.

He takes the fiduciary duty very seriously and lives it, not just virtue signals it. Good for you, bro.

Communication is key when charging by the hourSetting expectations the right way is critical when you are operating an hourly financial planning practice. Charging hourly is so transparent that there is simply no BS: you need to be able to justify the work done and the value that came from it.

My CPA charges hourly, and when I first started working with him, I was shocked by the first bill. It was almost $2,000! I brought this up to him and he offered to reduce it. Is that really fair to his other clients, if he did in fact spend $2k of time on me?

If my CPA had told me how lengthy the set up process was going to be in the first year, but that in the years the ensued the amount of hours would be drastically reduced, I wouldn’t have been so surprised.

With the AUM model, the fee is directed debited out of the account so most people don’t even realize what they are paying their advisor. As an hourly planner, you may have to shine a light on every single minute of time you are billing for. Take good notes and record all of it, and be ready to justify it, item by item, if asked.

How do you get clients to come back?Sometimes people work with you episodically, doing a project for a few months and then you don’t hear from them for a year.

When he is wrapping up the relationship, he has a meeting to go over what they have accomplished. This allows them to see the value of what they have done so far. If he has ideas about what to do next, he proposed creating another project (and agreement). His goal is for the projects to get smaller and smaller over time.

How do you track time as an hourly planner?Kevin tracks it on his phone but I have heard of others using apps such as GetMyTime or ClickTime.

I’ve also heard advisors say they use:

Excel spreadsheets
Paymo
Harvest
Toggl

Note, I have not used any of these applications other than MS Excel, and am not endorsing any such application.

How does he bill?How do you know that they are even going to complete the engagement?

Kevin says he charges half upfront and half upon completion.

How did he make it?This is a summary of how Kevin made it as an hourly planner. These are good tips for anyone who wants to succeed as a financial advisor.

Very focused niche on T Mobile employees
Exceptional communication skills and expectation setting
Built a good community online and nourishes them with high quality content
Focus on always providing value for the time he bills for

Did you enjoy this hourly financial planner success story?Alright that’s all for now.

Did you sign up for my daily newsletter?

Or if you want more…

You could also consider this LinkedIn training program which teaches financial advisors how to get new clients and leads from LinkedIn.

Thanks for reading. See you in the next one!

-Sara G

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Is AI taking over financial advice? Not so fast! ? Join Sara Grillo & Eric Negron today for the Truth Bomb as they break down how artificial intelligence is likely to impact the future of financial advising.

In this show, you’ll learn:

?Why AI won’t replace human advisors (it’s just a supercharged Google search!).

?How to ditch the complex jargon and connect with clients on their terms. ?
The biggest mistake advisors make in their marketing (hint: it involves a “dumpster fire”). ?

?How to answer “dumb questions” and build trust with your clients.

Don’t miss out on these valuable insights!

Transcript
We don’t want.

I think they want to be working with clients. I mean, but, Eric, this is a bigger question. Is that the advisor’s role, or should their role be talking to clients about what’s going on in their lives so that they could get a heads up on what the planning changes should be, changes to risk tolerance, et cetera.

I mean, it really depends on where you are in your career, right? If you’re just starting out or you’re under a couple of years, you’re everything. You’re the advisor. You’re the person that greets them. You’re the chief bottle washer. You’re the janitor. You serve the coffee. You do it all right, and you do everything within your business. And then as you evolve, if you do it right, then you do exactly what you said, sarah, you spend way more time trying to be in front of clients, not worrying about other things. But I still think, even if that’s the case, you still got to understand technology so that you can be more efficient. I think that’s just me. Mean, the biggest thing that everybody talks about, right, that’s going on in our industry is all this talk about artificial intelligence.

I’m going to be honest with you. We right now have a supercharged Google search. At the end of the day, the only AI that matters to anybody is advisor intelligence and collaboration and heart of connecting with one human being to another. It’s just a damn tool. What do you think about all this ruckus about AI disrupting advisors?

I don’t believe it. I think it’s nonsense.

The whole concept of AI or the whole thing.

No, I don’t believe it, because I write blogs for a living, for people, and I’ve seen some of the stuff that comes out, and I just end up having to rewrite it. We would be way better off if we had just passed over the whole thing to begin with. I don’t know when the market financial advisor marketing already looks like it was written by a robot. You get advisors hire me to write the blog, and then I’ll say, okay, what do you want to write the blog about? What are the main points of Roth conversion? And they’ll say, I don’t know, but you should go check out my five competitors who have written blogs on this recently, and that’s who they learn it from. You understand? So I feel like we’re already doing AI.

Yeah, I feel like the reality of it is, you talked about AI, you talked about marketing. I think most advisors marketing is a dumpster fire of garbage.

I agree with.

So it is so bad. There’s been no client. When clients go to Google, they ask simple terms like, how do I set up a Roth Ira? What are the tax consequences of x?

No, but, bro, they wouldn’t even ask it like that.

Yeah.

What tax do I pay when I retire?

Yeah, exactly.

It doesn’t even make sense. Right? How do I retire from Procter and Gamble? Or not even that. It’s not even the complex questions like, what’s the best investment for the Procter and Gamble 401k plan? Or, like, what are the expenses, average expenses in the proctoring? No. How do I log on to my Procter and gamble 401k? Like, number one, Google search? Okay. You understand?

Yeah, I get it. I think that as advisors, we really need to bring down the level of our sophistication. We live in an industry of jargon, and we think that we’re smarter than everybody else because we took some security exams or we took the CFP, and we come out, we want to talk in these complex terms. And I don’t know if you’ve listened to some of these people, you’re like, what the hell did you just say? It’s like going to a foreign land and you’re speaking one language, they’re speaking another, and people are just getting agitated because they can’t understand.

Yeah. But I think it’s natural for a lot of people that do that in any profession. With my daily newsletter, I started commenting not on opinion stuff like, how do you be more ethical and transparent in your right? I started with, like, how do you log on to Google Analytics? That would be an example of one of the questions I would answer. And I just answer these questions on a daily basis. These little nuggets. And people are, like, eating this stuff for breakfast. People are, like, tuning in every day. I get, like, five. I thought I was being so smart. I think there should be a rule. If it makes you sound smart, it’s not good marketing.

Yeah.

If it makes you look and sound like you’re dumb, it’s a dumb question. Then it’s good marketing, because I’m telling you, I literally get, like, two or three emails a day from people that are like, you know, I never realized that there are two different types of pages on LinkedIn, my personal page and my business page. I never even realized what the difference was. So you know what I’m saying? Like.

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Join Sara Grillo & Eric Negron and learn how to ditch the “advisor speak”, get past the financial advisor jargon, and win more clients!

In this podcast, you’ll discover:

?Why complex language can cost you business and how to communicate clearly instead.

?The powerful secret to explaining financial concepts in a way that everyone can understand (even your parents!).

?How to avoid getting stuck in an echo chamber and prioritize what actually resonates with clients.

??Real-life examples of how simple communication can lead to bigger wins.

Listen to the full discussion and start building stronger client relationships today!

Transcript
I can’t stand this. I mean, like, have you seen this, too, though, with advisors, with their marketing like that? They’re just totally. It’s totally off base.

Yeah, it’s so. It’s honestly so bad. You know, I can tell you, like, we hired. We hired a. We hired a kid. And I’m going to call him a kid because he’s younger than me. Everybody who’s younger than me is a kid. We hired this kid.

Your sound of, like an old man now.

I’m getting old. I’m toeing the line of 40. I’m starting to get, like, joking. I got some salt inside my beard now. I’m getting old man vibes. I’m getting grumpy. I told somebody that the other day.

Old until you realized that the music that you liked when you were in high school and middle school is now, like, oldie stuff.

Oh, my God, don’t tell me that. I went out, like six months ago, right? I went out downtown. I live in Austin. And I’m sitting there and some old school comes on and I’m jamming. I’m like, oh, this is my stuff. And these kids are like, oh, man, this is oldies. I was like, what did he just say?

Like salt and pepper?

Yeah, I grew up to that.

It’s like the music. They had, like, no cuss words. When rap had no cuss words.

Yeah, exactly. When you had to be skillful in how you’re going to put your flow together. Right. It’s interesting. I was just saying, we hired this kid, and he’s out here. He calls me one day, he’s like, listen, I have this client that has a lot of money, right? And I keep having these meetings with them. It doesn’t go anywhere. Can you sit on the meeting with me? Sure. Yeah, I’ll sit on the meeting with you, help you do what you need to do. Fine. I get on the first meeting, I’m like, let’s do two meetings with these people. I get on the first meeting, I listen to him talk, and I’m like, dude, I don’t even understand what the hell you told them. And I’ve been doing this for a long time. I’m like, a confused mind says, no, okay?

That’s what I’ve always learned about psychology of communicating and selling. A confused mind says, no. If you confuse me, it’s no, I can’t do anything. I’m really comfortable. So we get on this next meeting with these clients, okay? And I’m like, I’m going to talk this time. I’m like, hey, listen, guys, I’m going to pull up my iPad and draw some concepts. I’m going to talk to you about what we think you should do. So I start drawing. I say, listen, I didn’t go to school for art, so don’t laugh at my ugly stick people. And I laugh. Ha. They laugh. Okay, cool. I go through and I draw out these very simplistic concepts. They’re like, nobody has ever explained anything like that to me. You know what? We have this other million dollars.

We want to go ahead and give that to you now. And so this advisor over here, I was so happy for him. He won the business. I helped him, and he’s like, I’m changed forever. How did you do that?

I was like, man, I answered dumb questions.

This is what I’ve been doing for 17 years, and I drew it out. So we figured out. Then I sat on a couple more calls with him, and we figured out, like, hey, don’t use advisor language. Use cocktail party, low iq. We had a couple of drinks, and I want to explain it to you simply. Language. When we talk.

No, like you would say, explain to your parents. Yeah, or like a friend of know.

Here’s the thing, right? It’s funny. I got some buddies that are on. You talked about LinkedIn. I got some buddies on LinkedIn that are doing a great job with their content. They said to me once, they’re like, if I post this, the advisors who follow me are going to think I’m dumb and I don’t know what I’m talking about. And I said, hey, you’re writing to your potential clients and they don’t know what the hell this thing means. And it doesn’t matter what your colleagues think, as long as they’re the ones that not getting the client. And you are. And you’re bringing on new clients because you’re explaining stuff in ways that they get. And so because their confusion is low, and now you help them understand something like, yes, I want you to help me. I love it.

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Hiring your first team member as a financial advisor can be daunting, but we’ve got you covered! Join Eric Negron & Sara Grillo for today’s Truth Bomb as they tackle the challenges of hiring & training in the financial advisor world.

In this discussion, you’ll learn:

-Two distinct approaches to building your team: “Pay to Play” vs. “Budget-Friendly” strategies.

-How to create a “How-To” library to train your new hire effectively.

-The importance of mindset and clear communication when delegating tasks.

-Actionable tips for identifying and delegating draining tasks.

Transcript
You ready to get right into it today?

Yep. Let’s go.

So I was on an advisor forum the other day, and advisor says I’m looking to make my first hire. Where do I find them and how do I train them? What do you think about this question?

I think advisors have no patience, and what you should do is just go check out the competition and who’s working for them on LinkedIn and try to swipe them.

So you’re talking about being a professional home wrecker here. We’re about to go break up somebody’s apple cart.

If it can be wrecked, I think you should just kind of get in there, because this is the business world, and may the best person win.

As the saying goes. That guy said, hide your wife, hide your kids. If you got a quality people, we coming for them. Anybody? Listen to this.

Don’t leave your employees around me. Because you think about it, right? At the end of the day, with that approach, you are going to pay more, but it is the least risky option. And if we’re talking about serving the clients the best that we can, having to not train somebody that much, maybe pay a little bit more for it, but have them be able to hit the ground running with not a lot of errors, that’s what I would go for, but what do you think?

So you’re talking about pay to play. Let’s just play and get right in the game. I want to get a thoroughbred.

Let’s get it over with. Right?

Yeah, with.

I just said, advisors are not patient. They’re not patient. Okay, I hear you. Go do this on LinkedIn. Go upload this on LinkedIn. Put this word in your headline, and I’m getting, like, five emails like, LinkedIn doesn’t work. I was on LinkedIn for 5 minutes, and I didn’t get any clients. What’s wrong with LinkedIn? We have no patience.

Yeah. I would tell you it all comes down to your budget. So if you got budget to go out and buy a Thoroughbred, great, take the strategy, go there quicker. But some of these advisors out there, if you’re looking at doing this and you want to do it on a budget. My approach was actually different. I basically had a conversation with myself one night that said, hey, I never want to do this account paperwork, this whatever, ever again. This is the last time I’m ever going to do it. I pull out my screen recording software. I start recording myself walking through step by step doing process in my business, create a how to library. And then I started looking for a stay at home spouse, an army spouse that I could hire.

Found one for $20 an hour and basically gave her tasks inside my CRM and said, hey, do this. Here’s the video. Watch it. If you have any questions, ask me. Been with me eight years now. Runs everything in our companies. I’m going to call that. That’s balling on a budget. For those of you out there trying to be balling on a budget, we got you. This is the pro tip. There are plenty of stay at home parents that want some work between the hours that little Johnny is in.

Know I love that. And it does require a little bit more patience and the ability to actually operate technology, which is also not a great strength for financial advisors. But I think that one thing that probably helped you succeed with that was you were in an absolute mindset, right. The videos were probably awesome, because when you have that attitude, like, this is the last time I’m doing this, I’m done. I’m fed up. I ain’t ever doing this again. It’s probably going to be your best work ever.

I agree with you.

People can see that in you, too, right?

Yeah. I’ll tell you this, too. Financial advisor. Listen, stop being lazy. It’s not that hard to figure this out. Here’s what the deal is. Pull out a piece of loose leaf paper, a composition notebook. Take your behind down to the grocery store. It used to be $0.99. Maybe with inflation is $2. I don’t know. But get you a composition notebook. Make a list of all the stuff that you do right next to each one. E, N, or D. Is it energizing? Is it neutral? Is it draining the stuff that’s neutral and draining? You better figure out how to make a video and delegate that stuff yesterday, because you ain’t getting paid for that. And you ain’t best in the world at stop doing it now.

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Financial advisors are skeptical that you can actually get leads from social media. Well today I have a planner who has blown up his lead pipeline, in less than nine months. Today we’ll be talking to Thomas Kopelman, co-founder of AllStreet Wealth and you want to pay attention here because he makes getting leads from …

This financial advisor makes getting leads from social media look like a piece of cake! Read More »

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Not the premium – but the actual costs of the insurance policy. That’s what people think they grasp. When you pull back the curtain you see that insurance costs are often excessive – but the illustration will never tell you that! I’ve got some guests here who are ripping the veneer off the facade. Listen …

How to CRACK the secret costs in an insurance illustration Read More »

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Indexed universal life (IUL) is often sold using smoke-and-mirrors sales shams, but in this podcast we’ll expose the truth! Listen to this if you are a financial advisors or consumer who wants to see through the crap and make better decisions about whether IUL is good for you (or your client) or NOT.

I am an irreverent and fun marketing consultant for financial advisors. IUL is NOT what it’s (usually) cracked up to be!A few months ago I posted to LinkedIn something like, “How come IUL is just as complex as a derivative with floors, caps, call options, and participation rates, yet it’s not regulated by FINRA”. Like many of my posts it sparked quite an outrage. Indexed Universal Life (IUL) insurance is all too commonly sold by smoke-and-mirrors. If you see the IUL grifters on TikTok claiming an IUL policy is better than a 401k, or that is has upside potential with downside protection, a “can’t lost money asset”, or “privatized banking” you’ll know why the outrage is well deserved.

Today I have one of the insurance “good guys”, one of the more knowledgeable people in the field, Bobby Samuelson, to shed some light on IUL. Bobby is the President of Life Innovators and the Executive Editor of The Life Product Review.

So much to dig into here, where do we begin?

Let’s start by defining what Universal Life Insurance (not Indexed Universal Life – but plain old Universal Life Insurance) is.

The policyholder pays a premium. These premiums are flexible – you can pay whatever you want between a minimum and maximum level.
Policy charges come out every month.
Whatever is left over earns an interest credit.
That’s your liquid cash value available inside the product
Every month this repeats

A life insurance illustration, which is what insurance agents use to sell the product, is just a mathematical depiction of this monthly cycle repeating over and over.

Okay…but what is Indexed Universal Life insurance?Now…indexed universal life insurance is where a carrier takes a universal life product (as described above) and instead of paying a crediting rate to the policyholder (as they would in a fixed universal life policy), they take those earnings out of their general account and go out and buy call options.

Quick tutorial:

A call option gives you the option, but not the obligation, to buy an asset at a particular price specified in advance, within a certain time period. If the underlying asset that increased in price, the call option holder would likely exercise the call and realize a profit of the difference between the strike price you paid for the asset and the market value of the asset.

Now, back to our regularly scheduled programming:

In the Indexed Universal Life case described above, the call option gives exposure to a general index. The insurance company gives those index-linked credits to the policyholder, instead of the crediting rate if it were a universal life policy.

Wait!

What’s this now – call options??

There was a great article in ThinkAdvisor in 2015 that provided an example of how the options written on IUL work. Here’s my take on it, based off the progression described in the article.

How do call options work in a IUL policy?IUL call options tutorial:

Suppose you have 100k cash value in your account on January 1st.
The insurance company makes 5% on their general account. So, they invest $95,238 in their general account, which will give them the 100k they need to give back to you in a year (they earn 5% on the $95,238, $95,2381.05 = $99,999). Let’s assume simple interest crediting, not monthly compounding, for the sake of argument.
So what do they do with the other ($100,000 – $95,238), or $4,762?
The invest it in call options to see if they can catch some market upside. See, because if the market goes up, then the insurance company is going to have to give you more than the $100,000 you have in there. There may be a cap, let’s say 10%, and a floor, let’s say 0%. If the market goes down, they don’t care – that’s on you. But if the market goes up, they are the ones liable to pay you.
So, they buy an “at the money” call option, that way if the market goes up, they will exercise it and recognize the difference between the strike price and the price of the market index. They will profit the difference between the strike price and the price of the market index, minus the cost of the option; and then credit that gain to the policy.
If the market goes down, they let the call expire worthless and all they have lost is the money they spent to buy the option.
They also sell an out of the money call and pocket the premium, so they offset some of the cost of the call option they just bought. However, consider that out of the money option are considerably less expensive than in the money ones. So they aren’t quite breaking even in terms of option cost; the closer to the money options they are buying are more expensive than the ones they are selling.
Anyways, the net cost of the two options (the one you bought and the one you sold), net of their premium costs, provides you with an amount that you divide into the $5,000 to determine how many sets of options, or spreads, you can buy. Let’s say the net cost is $20. You can buy 250 spreads.
Now, let’s say the index that you bought the call option on, the S&P 500 index, did 20% that year. Well now the insurance company owes the policyholder $100,000(1.20), or $120,000, which is $20,000 of earnings credited from the index exposure.
Let’s say the S&P Index that they wrote the option on stood at $100 on January 1st. Now it’s at $120. The insurance company makes $20 for each spread, assuming the second call did not get exercised (the out of the money call). They bough 250 spreads, so they make $5,000 from their option position, falling short of the amount needed by $15,000.

-Source: Sara’s Grillo’s interpretation of knowledge imparted by ThinkAdvisor 2015 article, “How (and why) indexed universal life really works.”

All of this is to show that IUL isn’t a simple instrument. Agents and consumers have to understand the complexities of the derivates market (see tutorial above) to really grasp what is going on.

In addition to the call options, there is a cap and a floor set by the carrier for the crediting rate in an IUL policy. And THAT is where it starts to get even weirder and insurance agents go off the deep end.

Can you lose money in an IUL? Is it risky?The fact that IUL provides exposures to an index, rather than a crediting rate, allows insurance agents to lose their minds.

They go crazy and paint it with BS statements like:

Tax-free guaranteed income
Can’t lose money asset
Upside potential with downside protection
Privatized banking
Be your own bank

Remember that there is a floor to the crediting rate, but that doesn’t mean you can’t lose money. Remember the insurance policy has costs. If the rate credited does not exceed the policy costs, you will lose money. Or if the market index has a negative year, the call option is not exercised, and the policy just earns whatever minimum floor rate the insurance company specifies, the policy still loses money due to policy costs. You don’t earn a negative crediting rate, because of the floor, but the policy overall still loses money.

That’s a huge risk, right?

Then how come it’s sold as “can’t lose money asset” and other BS claims?

Here’s the truth about IUL.

It’s not structurally a dangerous product; insurance agents sell it irresponsibly.

-Bobby Samuelson

How so?

The illustrations are where it gets WACKO.

IUL illustrations and false performance expectations: a grande problemoIUL is marketed with very high illustrated rates and high expected performance rates, and that is where things get dangerous. People will take out loans again their house or take money out of 401(k) with the expectation that the performance will be there, and many times it is not. We have seen scenarios where clients go into it expecting to earn 6-8% and the policy earns 3-4%.

As with any cash value life insurance product, there is the potential for the policy to lapse if the policyholder can not pay the premiums out of pocket. Or the cash value could decline from policy charges increasing by more than the policy earned that year, or market could perform badly, making it so the policyholder can’t pay the premium from cash value.

Here’s why that stinks.

Policy lapse results in phantom income tax on the entire amount of the capital gain in the policy, plus there is the disappointment of having an asset you counted on (maybe to retire) go to zero.

The issues lie in how IUL policies are shown to clients, in the illustrations. Aggressive illustrations depict aggressive performance expectations, and then the policy doesn’t perform well enough to overcome the policy charges.

Add in some leverage and POOF it’s a powder keg waiting to explode!It gets even worse in the case of using leverage. Remember that policyholders can take a:

Fixed rate policy loan
Variable rate, floats with Moody’s Composite Bond Index
Carrier declares the rate

In most IULs, the illustration shows the client taking a policy loan. This effectively collateralizes the cash value of the policy. The illustration assumes that if you take a loan out, and the carrier charges you let’s say 5% to take that loan out, they show that the illustrated performance on that loan you have taken out is actually 6-7%. It’s shown to be higher than the 5% loan.

Here’s the kicker: you have to beat the loan rate in order to keep it working. The illustration looks like it is always going to outperform the loan.

If you have a bad performance year and you have a policy loan, (and Bobby has seen situations where 95% of the value of the policy has been loaned out), the loan value goes higher than the account value. The policy can lapse leaving the client with a phantom income tax bill.

But the grifters on TikTok are illustrating scenarios like this and it’s super scary like a haunted house on Halloween.

How to help clients know if an IUL policy is for them or notIf your clients are considering IUL, follow this process to help them determine if Indexed Universal Life is for them or not.

1 Focus on the product not the illustration

Help them understand what IUL is. Most people don’t really understand how the policy works because, as mentioned above, agents sell it as “magic.” You should also help them understand the benefits, not the illustrated performance, but the benefits of owning the product.

A tax advantaged asset
Death benefit
Tax planning needs
Cash value growth
Cash value liquidity benefits

2 Use a realistic (low) crediting rate in the illustration

The assumed interest rate in an illustration is what is driving the long term performance. Hone in on that assumption. There is a rate called the Maximum AG 49 rate. It’s not what the carrier is actually crediting; it’s just a way to convert the options strategy into an illustrated rate.

AG49 is a big problem when it comes to IUL marketing. So let’s pause here and talk about it.

What is AG49?in 2015, the NAIC created AG49 (Actuarial Guideline 49) which allowed for the creation of a Benchmark Index Account (BIA).

According to Premier Brokerage Services:

“The BIA is a one-year point-to-point S&P 500 index account with an annual return cap, a 100% participation rate, and a 0% annual floor, using the S&P 500 price level only (no dividends on the underlying stocks). AG49 then defines a maximum illustrated annual index credited rate based upon an average 25-year lookback calculation.”

-Premier Brokerage Services

Why is AG49 a problem for insurance illustrations?Remember that the carrier sets a cap, or the maximum credit you can earn.

Let’s supposed for a minute the cap is 10%. The cap is likely to vary over the time period of the forecast, then how do you illustrate it?
The fair market value of the cap is what the carrier paid the investment bank to buy the 10% cap. It would be logical to look at the fair market value of what the carrier spends for the cap. However, the industry needs a way to make IUL look better than traditional UL.
So they apply the 10% cap to historical equity data. They then project out the performance for the next 50 years.

In other words, the illustrated rates are subjective. There is no long term history for these products. There is no actual backtest.

KEY POINT For advisors:

When you look at the illustration and you see an illustrated rate that is 5, 6, 7% based on the maximum AG 49 rate, which is the cap applied to the historical data, as an advisor you should ask for a much lower number, such as 2-4%.

This is such a key point, let me repeat it again:

When you look at the illustration and you see an illustrated rate that is 5, 6, 7% based on the maximum AG 49 rate, which is the cap applied to the historical data, as an advisor you should ask for a much lower number, such as 2-4%.

-Undisclosed

3 Try to ignore the illustration

The illustrations are a distraction. In general, the less you can rely on the illustration the better it will be (for all the reasons mentioned above).

Recommended reading for insurance agentsWhoaaaaa so that was alot. This stuff can get very technical and that is where the opacity/confusion comes in and makes the marketing very deceptive to the average person who isn’t familiar with all this stuff.

Here are some reading materials that Bobby recommends, whether you want to learn more about insurance, selling insurance, or specifically about Indexed Universal Life.

The Story of Life Insurance by Burton Hendrick

The Life Product Review – Bobby Samuelson

Society of Actuaries

LIFE180 – Chris Kirkpatrick

The IUL Experiment – Andy Panko

Sara’s upshotDid we get you jacked up over exposing the truth about Indexed Universal Life?

If yes…

Join the Transparency Advisor Movement.

The Transparent Advisor Movement’s mission is to promote ideals of clarity, modesty, integrity, dignity, and client advocacy in all aspects of financial advice, with a special focus on Advice Only, Flat Fee, and Hourly service models. There is a special emphasis on clear disclosure of services and their related fees.

The Transparency Movement is the future of the industry – we welcome anyone who believes in our values to join us.

Join our next Transparent Advisor virtual meetup.

These meetups are free and the goal is to learn from each other about how to grow and manage a transparent practice for the benefit of clients.

Even if you can not make the meetup, or even attend in its entirety, please register for the replay and to be notified of the next one.

For marketing tips in the transparency age…

You could also consider my financial advisor social media membership which teaches financial advisors how to get new clients and leads from LinkedIn.

Thanks for reading. I hope you’ll at least join my weekly newsletter about financial advisor lead generation.

See you in the next one!

-Sara G

About Bobby SamuelsonBobby co-founded Life Innovators in 2018 and has been President and CEO since its inception. Bobby was formerly Senior Vice President and Head of Life Insurance and Annuity Product Development and Pricing at Brighthouse Financial and Vice President of Life Product Development at MetLife. Prior to joining MetLife in 2013, Bobby was a consultant to life insurers, distributors and high-end agents. He is the third generation of his family to work in life insurance. He is also the Executive Editor of The Life Product Review since 2012. Bobby is a regular keynote speaker at corporate and industry events.

Transcript0:00:00.6 SARA GRILLO: As ago, I post it to LinkedIn, something like, How come I… L is just as complex as a derivative with floors caps, call options and Participation Rates, yet it’s not regulated by FINRA, like many of my post, it sparked quite an outrage, and if you see some of these drifters on tiktok claiming that IU is better than a 401, that has upside potential. Downside protection, a can’t lose money, asset privatized banking, infinite banking, all of the crap that people are saying about it, you know why the outrage is well-deserved, but the good news is that we’re gonna bring some transparency to it. And today, I have one of the good insurance guys, one of the most knowledgeable people in the field, Bobby Samuelson, here with me. To shed some light on IL body is the President of Life innovators and the executive editor of the Life Product Review. Hey, Bobby, thanks for being here.

0:00:58.6 BOBBY SAMUELSON: Thanks for having me on. I’m excited to talk about index tools should be good, and this topic needs transparency, so I’m sure I have a great conversation about it.

0:01:07.6 SARA GRILLO: Awesome, so be… Let’s just start with a real quick definition, what is IUL?

0:01:12.8 BOBBY SAMUELSON: Yeah, so let’s actually take one step back and say What is universal life, because I think a lot of times we kind of get wrapped up in the different variations of universal life, and I think it’s good to start at the beginning and say, Okay, what actually is this product, and then then I’ll make the different variations make more sense, so universal it is a very simple product, I think if you’re a financial advisor and you’ve seen it out in the marketplace, it probably doesn’t look simple, but the actual math is very simple, and the way it works is you put a premium on, and the premiums are totally flexible, client can pay and really whatever they wanna pay down to some sort of a minimum or all the way up to the tax maximums, policy charges come out every month, whatever is left over, earns an interest credit, and then that creates your cash value, and every month the cycle repeats, you can pay premiums or not, policy charges are still coming out, whatever’s love over earns interest, and then you have this liquid cash value available inside the product and all a illustration is the…

0:02:05.5 BOBBY SAMUELSON: Which is what the financial advisors typically see is just a forward projection of this monthly cycle recurring over and over and over, over again. So the way the universal life policies are typically differentiated is by how that interest is being credited on the cash value, and so you have sort of traditional fixed Universal Life, which basically the carrier declares a crediting rate on that policy, then you have variable universal life, where you take the money and you actually invest it into insurance, dedicated mutual funds, and you get whatever investment returns you get, policy charges are still deducted, but the returns are kinda controlled by the funds themselves… The investments that you’re making, and then the last piece, which is the one we’re talking about today, is index, where the carrier effectively takes the universal life product, fixed you out, and instead of paying a crediting rate, they take that earnings, those earnings off their general account. They go out and they buy call options, and the call options provide index linked exposure to a one

0:03:02.5 SARA GRILLO: Second… I’m sorry, let’s just go back over what a call option is just because I… I, I’m so sorry for this baby. Okay, so let’s go back to the part where you said, and I… Well, is like a fixed UL and then let’s go back. Yeah.

0:03:17.5 BOBBY SAMUELSON: Well, so I’m gonna explain it later, and that was where I was gonna go, so I was gonna say, you may not know what a call option is, here’s kind of what it does, here’s the index credit, that’s how it does it. But yeah, I can go back to that. No, that’s no problem.

0:03:28.1 SARA GRILLO: Okay, you start with that point.

0:03:31.0 BOBBY SAMUELSON: Yeah, yeah, so where the fixed universal life product, you get a crediting rate declared by the insurance company and they’re supporting that with their general account assets with a variable universal life policy, the carrier takes the money, they invest it in the carrier with a variable universal life policy, you invest directly into funds, mutual funds, insurance, dedicated mutual funds that are held in a separate account, and so that’s the investment eternity is whatever it is, with index will, the carrier basically says, Alright, instead of paying the crediting rate to the policy holder, like we do in a fixed universal life policy, we’re actually gonna take that crediting rate, we’re gonna go out and we’re gonna buy call options, and all the call option is is expose exposure to the performance of an external index, and so by buying these call options, we now can give these index linked credits to the policy holder instead of the crediting rate in the universal life policy. So one of the key things to know right off of that is that universal life in IL are essentially the same product, the only difference is that with Universal Life, the carrier gives you the crediting rate, an index universal life, the carrier takes the credit in rate, goes to an investment bank, buys call options, and then that gives the client index linked exposure, so the fundamental math of fundamental mechanics, all the underlying financials are identical except for that last step where the carrier takes the credit rate, gives it to the Investment Bank, buys options and the options provide the index linked exposure, now, that’s also the part where it gets really complicated because I think when you look at all the stories about all what this thing does, how it work mentioned a downside protection, upside potential equity-like returns better than a 401…

0:05:15.0 BOBBY SAMUELSON: Nobody would say all that about just a regular old universal life policy, but the only difference been universal life and index to is that Options piece, that very last step, and what that does is create this kind of illusion and this veneer that IL is something fundamentally different that it’s an equity product, that it does all these magical things, and the reality is, all it is is really just a universal life policy or carrier, again, it takes a credit rate instead of giving it to the policy holder, gives it to an investment bank to provide Index link exposure. And that’s it. So fundamentally, that’s what index I is now, there’s lots of different discussions about how it’s illustrated and how it’s used and how it’s marketed, but in terms of the mechanical structural construct of the product, that is what that product is…

0:06:02.1 SARA GRILLO: Why is it dangerous? From a market perspective.

0:06:09.4 BOBBY SAMUELSON: It isn’t structurally, it isn’t dangerous, it is just the same as a fixed life insurance policy.

0:06:17.6 SARA GRILLO: Okay, let’s just go over that actually, what is the danger with any investments insurance products and so value insurance product… What is the danger there?

0:06:29.2 BOBBY SAMUELSON: Yeah, the dangerous policy labs, and the power of a whole life policy is it is a guaranteed premium with a guaranteed death, but if they guaranteed cash as it can’t ever lap, so there is really kind of no danger in a typical whole life product in terms of policy labs with the universal life, because the premiums are flexible, you can have a policy labs, you can have a situation where the policy charges increase or the credits aren’t good enough, and the cash how starts to decline and you end up kind of undulating the policy, not getting what you thought you were to get that first.

0:06:59.0 SARA GRILLO: If you can’t pay the premiums yourself…

0:07:02.6 BOBBY SAMUELSON: Correct, yeah, then you don’t have enough cash to cover their policy charges, and again, that monthly cycle repeats every month, there’s always a charge to be paid, and if there’s not enough account by the policy lapses.

0:07:14.0 SARA GRILLO: When what you do in that case… Let’s say that that happens. Let’s say that the S and P has it, like last year I had a bad year, and it’s not crediting enough to the cash account, and I have these flexible premiums, but my premium had gone up because the class from insurance had gone up. And so the company raised the premium rate on me… Yeah. What do I do?

0:07:36.5 BOBBY SAMUELSON: They actually wouldn’t raise the premium, I think this is one of the misconceptions here, is they would say, Hey, would you would not as a policy holder necessarily know that you need to pay more premiums, you would need to go through an annual review process with the agent to have them tell you, Hey, you’ve got a problem because the carrier just says, Oh, you planned to pay X, Y, Z premium, that’s all we’re gonna bill you for, unless you tell us to Billy something different. And so to your point, last year when the market goes down, you get a 0% credit in an ill… Let’s say policy charges still come out, the cash is gonna decline that year, so you mentioned earlier that one of the marketing pitches for ALS, you can’t lose money. That is absolutely not the case. You are guaranteed to lose money every time the market goes to… Every time the market goes down, you get a 0% credit, policy charges still come out of the account value, they can value will decline, you will lose money that year, and the amount of money you lose is gonna be exactly equal to the amount of policy charges coming out of the contract.

0:08:32.7 SARA GRILLO: Or it could not even be, it might not even be when the market declines, but just if the market has a year where my crediting rate does not overcome the policy charges than you think

0:08:46.1 BOBBY SAMUELSON: You… That is correct. I say you’re guaranteed to lose money when you have a 0% because you know that it can’t overcome it, but to your point, there’s this grey area where you might actually get a flat year or a negative year in terms of cash, your performance. If the credit isn’t big enough, if it’s a 1% credit or a 2% credit and your policy charges are greater than that, so that kinda leads to the other risk, which is so that’s potential policy labs, but the question of sort of disappointment is a different question, so when you look at how whole life in a lot of ways, and I, especially our marketed, they’re marketed with very high illustrated rates, very high performance expectations. And that’s where things get dangerous. It’s not that policy lapse is the biggest risk, the problem is that clients go in and you and I have seen crazy stuff, people borrowing money against their house, taking money out of 401Ks to buy IL, under the idea that this long-term performance will be there for them, their worst case scenario is probably not a policy lapse because they’re over-funding the contracts, and the idea that the charges will need Upolu…

0:09:47.1 BOBBY SAMUELSON: It’s pretty remote. The problem for them is that they went into this deal thinking they were gonna hurt and ET 788%, and they actually end up earning 3 E45%, and that… Is that now their whole financial plans… Erectus Earl. Yeah, you have a short fall. And so this kinda leads to the real issue, which is the danger back to your question with IL is not a policy structure, the policy structure is sound, the policy structure works, the policy structure will work anyway you want it to, like a universal life policy would… The problem, if a danger is on the illustrations and the way that these things are being illustrated in the performance being shown to clients, that is where the issues are. And that’s, again, if you think about all the ways that these products are being marketed on talk and whatever else, it all relates back ultimately to this aggressive illustrated performance being shown to clients, which creates aggressive expectations of future performance that they may not get, and if they don’t get it to your point, they’ll have a shortfall, they won’t get what they thought they were gonna get if they’ve applied leverage, they won’t be the leverage, that’s what

0:10:51.7 SARA GRILLO: The tool… Can you just talk about that? ’cause I think that’s not well understood by finding…

0:10:55.9 BOBBY SAMUELSON: Yeah, so there’s really two types of leverage that people typically illustrate applying to these contracts, the simplest one is simply policy loans, and so in every… All out there, the primary illustration that you see is when the client takes a policy loan, they are effectively collateralized the cash pay, so think about taking out a home equity line on your house, it’s the same concept. With a home equity line to collateralized your house. And then the house, hopefully appreciates irrespective of the fact that it… As collateral against it, same deal with Anil, you’re collateralized your cash value, you’re taking that loan. And what the illustration assumes is that if you take a loan out and that carrier charges you, let’s say 5% to take that loan out, they show that the illustrated performance on that loan that you’ve taken out is actually sector 7%. It’s something higher than the 5% that you’ve taken out, and so you have this concept, again, to use the helo example, if you take a home equity line, Imagine forever taking home equity lines off of your house that works as long as the house appreciates faster than the interest rate on the helo increases, same problem, or saying the issue shows up in an L where you take the loans out, you apply leverage, ’cause now you’re borrowing money, you have to beat the loan rate in order to keep this working, and so the illustration looks like it’s gonna always outperform a loan, you can take money out forever, the policy equity grows even though you’re taking money out of it, it’s this magical phenomenon where if you look, for example, like take the 4% rule.

0:12:28.4 BOBBY SAMUELSON: If you apply the 4% rule, that logic of, Okay, I’ve got a million dollars, I can take 4% every year. If you look at that, look at Il illustrations through the lens of that, most live illustrations show eight to 12% withdrawal rates on a balance because of this arbitrage being illustrated in the contract, and it’s a ton of leverage. So back to your question, What happens if you get a bad year… Well, if you don’t have any policy loans and you get a bad year to your point, 00% credit policy charges come out your account by… You will get by a little bit, but if you have a policy loan, and I see a lot of situations where 95% of the value in the policy has been loaned out through income streams, you have one bad year and that policy lapses because the loan value goes higher than the account by you, so come, you get a policy lab, and at that moment, the client gets stuck with a phantom income tax bill for all of the gains in the contract that they have pulled out, and all they really need is just one, maybe two years of Zero Percent credits, and that’s the leverage I’m talking about is if it’s an unlevered contract, 0% the year, just causes your account late dip, but if You’ve levered up, you’ve taken all these policy loans, now you are incredibly sensitive to any variation in performance.

0:13:41.1 BOBBY SAMUELSON: And that will cause the policy to potentially laps, and again, you get stuck with the fan of income tax bill, so that’s the main type of leverage that I see on index to illustrations and all the tiktok stuff. All the used IL for retirement income, all uses this strategy, that’s the core of that strategy is this loan and this arbitrage in this long-term illustrated performance

0:14:01.0 SARA GRILLO: Is the long… Typically, fixed or variable.

0:14:04.5 BOBBY SAMUELSON: It depends. So they’re basically three types alone, you can take it, you can have a fixed rate, which is what I described, simplicity 5% rate, you can have a variable rate where the rate floats with the Moody’s composite Bond Index, and so that’ll move up and down a bit last year, we’ve seen obviously a huge increase in those rates being charged as interest rates have come up, and then the third way is that carriers can declare the rate that they charge on the loan, and so they don’t directly link it to the Moody’s composite. They don’t guarantee it at a certain rate, they just simply set the rate however they wanna set it, and they’ve gotta manage their own internal dynamics on what rate they wanna use, but they might declare a new loan rate every year, every six months or every two years, however they wanna do it. It just depends on the company. And by the way, there’s no right or wrong answer, all these loan structures have different times where you’d rather be in one versus the other, personally, I think the declared rate loans are actually the best way to manage a policy in the long run, but there are advantages and disadvantages to all the structures.

0:15:02.4 SARA GRILLO: Okay, Bobby. So let’s just suppose that I’m Mr. And Mrs. Financial advisor, and let’s just even suppose I’m a fee-only advisor just for the purpose of simplicity, I do not sell insurance, I don’t get compensated for insurance, I can accept commissions if someone needs term life, I refer them to the insurance agent down the street. So one of my clients comes in and says, I was in my country club and there was Mr. Mrs. Insurance agent that was putting this in turn solely in front of me, so excited. We could go to Bermuda, okay. So like, What do I do with that plan? I’m sitting here looking at the illustration body, what do I do? How do I know? How do I see through the illustration… And dispel this myth.

0:15:51.7 BOBBY SAMUELSON: So again, I think it all starts with helping the client understand what the product is, and I’ve talked to… I don’t sell insurance, I’ve never sold insurance, but a lot of people find me on the internet and they call me clients, end users finding the internet and they say, Hey, I bought this IL or I’m considering this UL or any type of policy. What is it? And I always, always start with the same explanation, every permanent life insurance policy works the same way, premiums come in, charges come out, whatever’s left over earns interest, that’s your cash value, if clients don’t understand that and if advisors don’t understand that, the rest of the conversation is extremely difficult, because what that allows you to do then to say, Okay, I’m looking at a bunch of numbers on a page, I see that the client puts in 100, 000 in the first year, and they only have 80000 of account by you. What do I know right off the bat that there were 20000 worth of policy charges that came out, because we know the formula premium in charges out interest earned is actually probably more than 20000, 22000 or so, ’cause they’ve gotta earn interest on whatever is left over, so you have to know, that’s what’s going on.

0:16:53.1 BOBBY SAMUELSON: That’s number one, and then the second thing I’d say is, Alright, so knowing that that’s how the policy actually works, then we know that there’s no magic going on, I’m here. The only thing happening on this illustration is the Assumed interest rate is what’s driving the long-term performance, and so we need to hone right in on that a student interest rate assumption, and so on an illustration, you should be able to see exactly what the Assumed interest rate is for the future long-term projections that’s being used, and that’d be the thing

0:17:19.3 SARA GRILLO: In what you call the credit in grades.

0:17:21.6 BOBBY SAMUELSON: Correct, correct. Yeah, so crediting rate is a universal life, Assumed interest rate is probably a better term for IL because the carrier, there’s discretion when the UL… The carrier sets the crediting rate, and that’s what you’ll straight, You’ll trade less if you want to, but with IL, there’s this maximum age 49 rate, and you can kind of take a rate anywhere in between, and maximum 8249 is meant to be a guard rail, so it’s not what the carrier is actually crediting, it’s just a way to convert the option strategy essentially into an illustrated rate. It’s wildly subject.

0:17:53.4 SARA GRILLO: No. Okay, hold on a second. Yeah. Does this age 40? It was nine implied rates. Yes, that is not necessarily equal to what he gets illustrated a… What is it based on?

0:18:17.0 BOBBY SAMUELSON: Okay. So here’s what it’s based on. So again, you think back to the logic, this is a universal life and I all or the say the only difference is that with a UL, you get the crediting rate, you illustrate the credit rate with IL, the credit Oregon about the options, and the options give you exposure to the indicate

0:18:36.0 SARA GRILLO: Index. So this is not… By the way, everybody, this is not a direct investment into the index, this is correct. Exposure to the index, say, by the way, is it a total return or price only index is…

0:18:50.3 BOBBY SAMUELSON: These are almost all price…

0:18:52.1 SARA GRILLO: Okay, so the S and P price on the index. And let’s say that the S and P does 9% that year, EP is the implied crediting rate. 9%.

0:19:10.5 BOBBY SAMUELSON: Yes. If the cap on the cap is what the carrier set, so they set the credit in rate for UL, they set the cap for IL, and the way that they determine the cat, which is the maximum credit you can earn, the way that they set the cap-based on index performance, where this or the cat is by taking that credit rate and buying options, so if options become expensive, the cat

0:19:33.5 SARA GRILLO: Must do and options become expensive when it’s a volatile market… Correct. To more expensive options, which would mean the cap is lower probably right, ’cause the insurer’s gonna take their share and the AG 49 rate is gonna be lower.

0:19:50.8 BOBBY SAMUELSON: Correct, correct. So that’s the dynamic. So the cap, you would expect the cat to change regularly because option prices change all the time, so the carriers earnings are pretty stable, but the option price… They’re always changing. So you expect this cap to move around quite a bit. So the way that these things are illustrated is a problem is that how do you illustrate the value of the cat… The carrier sets a 10% capital, say, What’s the value of the 10% cap that you should show on the illustration for the next 50 years?

0:20:18.0 SARA GRILLO: Well, they put 10%… No.

0:20:19.9 BOBBY SAMUELSON: Well, you would… Now they don’t. So they say, Okay, because you’re not gonna hit the 10% every year in the S and P, so that would be too high, but the guaranteed minimum is zero, that would be too low. So you basically have two options for how to illustrate it, one option, the logical option, the way that I think every financial advisor who’s listening to this would say, Oh, this is how they should be illustrated. As you say, Well, the fair market value of the 10% cap is what the carrier paid the investment bank to buy the 10% cap. So how much did that option strategy cost to provide the 10% cap, and that is equal to the crediting rate that you would earn on universal life policy, because remember, it’s the exact same thing or just instead of paying the policy holder there, paying the investment bank, so the logical way to illustrate, and IL is to look back to what the carrier spins, the fair market value that’s in percent cap. That is not how 04ers because that would make I and L illustrate the same. And all the sexy ways to use IL in a lot of ways wouldn’t work, if you land IL illustrated the same, you have to…

0:21:25.6 BOBBY SAMUELSON: The industry has built a way to illustrate a you better than you all, and so the simple way they do it is I say, Okay, let’s say the carrier has declared a 10% cap, let’s go and apply that to historical equity data. So let’s say it’s a temperate cap on the S and P. We’re gonna look back to the 1950s to see what the S and P performance was. We’re gonna apply the 10% cap to historical S and P data, and that is where the illustrated rate comes from, so they are taking historical S and P returns into the calculation to value the 10% cap, and then they project that for the next 50 years, does that make sense? Yeah, and so that’s where it… So again, back to your question, the only advisor is looking at an illustration… Again, in my mind, two things. This is how the policy works. This is the illustrated rate being used for the ledger, and what I’d say is, if the illustrated rate is at the maximum age, 49 rates are 5 and a half, 6, 6%, whatever it is. You wanna see much lower returns to get a feel for what is more realistic…

0:22:29.7 SARA GRILLO: Okay, by… Hold on a second, I have to go over this point again, can you just say that differently because this is very important…

0:22:38.2 BOBBY SAMUELSON: Yeah, yeah, so the illustrated rates are totally subjective, there is no long-term history for these products, there is no actual back test, it’s just a hypothetical back test, and so when you look at that illustration and you see an old traded rate, that’s five and a half 6-65% based on the Ag, 49 maximum rate, which like we just talked about, is the cap applied to the historical data, as in an advisor, what you should ask for is to see much lower numbers because they are a…

0:23:05.4 SARA GRILLO: Other than five and a half, six. Excuse exactly.

0:23:09.0 BOBBY SAMUELSON: Because you wanna see a more realistic picture of long-term performance live for a different way, this fee-only advisor that we’re theorizing here probably has a good view of what they think long-term bond yields are gonna be in long-term stock-held are gonna be and the client certainly, as a part of their planning conversation, we probably have a planning conversation and say, Hey, what should we assume for your portfolio about long-term future stocks and bonds… Right, I would assume that that’s part of the planning conversation, so if you illustrate an IU with a 10% cat at the maximum age 49 rate, and you are assuming the past equity returns are gonna be identical to future equity turns and the past S and P total returns, which is a driver of the price returns, the total returns are about 12-15% since the mid-1950s.

0:23:54.2 SARA GRILLO: But that is a total return… Not a price return.

0:23:57.5 BOBBY SAMUELSON: Correct, but if you think about it from a planning standpoint, you have a client who’s saying, I’m buying a Vanguard mutual fund, the mutual fund, it is a Total Return Fund, so if I’m an advisor and I’ve had a planning conversation with a client about long… Their long-term equity assumption, I’m not talking about price returns, I’m talking about total returns, right, even though the index product is only on price returns, right. So here’s the question, if you’re a financial advisor and you’re looking to that 6% illustrated rate in the IU with a 10% cap to your point on a price index, and you’re also assuming as a financial advisor long-term equity returns of 6%. If you hold the S and P straight up and total returns, those two assumptions are not the same, the assumption that goes into the 60% rate, you see in the IL illustration is only past equity returns, which are 125% total returns. So here’s the simple thing, if you’re an advisor and you’re illustrating out 12-15% for your client’s equity portfolio, then you can feel good about the 6% illustrated rate in UL, but if you have a lower equity return assumption, 8, 6, 7%, whatever it is, then you cannot illustrate 6% in IL, you need to illustrate four or three and a half or two, because fundamentally I is a much less risky, much less higher attorney asset then holding the equities directly.

0:25:13.7 BOBBY SAMUELSON: And so that’s the big thing is in Fred advisor is basically just being able to have a conversation with the client and say, Look, there’s no magic here. And this illustrated rate is what’s driving all this future performance, we advisor and client, we decided we were gonna use a long-term inhale percent equity return assumption for your planning purposes. This is illustrating it six, that’s based on a 125% historical ether return, we need to lower that illustrated right down to four or three and a half, or four and a half, and then if you still think this policy makes sense, then maybe we should do it maybe you can talk to your advisor about it, but if the deal doesn’t work at 4%, then this does not fit with your financial plan. Does that make sense? And so that’s the conversation advisors need to have is not, Oh wow, look at the illustration, look out Great, this looks… It’s, let’s talk about your expectations of the future, let’s talk about what this product actually does, and it may be a fit, but it probably… But if it isn’t a fit, a 4% illustrated rate, then it’s not a fetter, it has to at for three and a half or four and a half, it can’t just work at six…

0:26:19.9 BOBBY SAMUELSON: To your point earlier, a lot of what I see being marketed out there is very aggressively illustrated products, and that’s the whole appeal is the IL trader performance, and that’s where the advisor first thing they gotta do is tone that back to…

0:26:32.6 SARA GRILLO: That’s how the agent sell the product, they sell it off the illustration.

0:26:37.2 BOBBY SAMUELSON: Yeah, that’s right, that’s right. And if you’re a family advisor, you’ve gotta tone that down and make sure the product is a fit regardless of the old treated performance.

0:26:46.7 SARA GRILLO: No, we also might have some insurance agents that are listening to this, what would you say to them, what if they’re saying, Well, Bobby, I have to earn a living here and I’m competing against financial advisors who can go… Say the S and P does 15% year on year. How can I compete? Bobby, I’m gonna be illustrating IL at 35%. I have a wife and a mortgage and kids, and how can they survive and you doing this with honesty and integrity.

0:27:22.6 BOBBY SAMUELSON: If the industry is gonna sell 3 billion of AUL, and if tomorrow all the maximum militant rates on these products went down to 4% and sales went down to 300 million, then we would know that people were buying IL primarily for the illustration, not for the product itself. And that would be a huge problem. I don’t think that would happen. I think IL properly sold is a compelling value proposition. You’re talking about a tax preferred assets, you’re talking because of its death benefit protection, so there’s clearly death benefit planning needs, there are tax planning considerations, you can do it in a life insurance policy, the death benefit tax, meaning the… Then there’s the cash value, growth and the stability of the growth and the sort of downside protection, upside potential story, none of these things have anything to do with the long-term performance of the product, the reality is, every agent knows… Literally have Hagen knows that illustrations are not projections of future performance, everybody knows that, but they all sell as a… Illustrations are projections in the future performance, and that is where we have a problem, so what I’d say to guys, and I talk to people selling on you all the time, and what I say is this, the less you can sell off of the illustration and the more you can sell off of the death benefit, the tax benefits, and the cash by you liquidity benefits and return profile benefits, the more sustainable, the more resilient your sales practices will be, and I think the more the product you’re gonna sell…

0:28:51.7 BOBBY SAMUELSON: Illustrations are a distraction. We gotta sell what the product actually does and how it works, and that’s the best way to say I will and look, there’s nothing to hide. The product is a good product, it does what it’s supposed to do. The easiest, properly… Yeah, when it’s properly illustrated, it does what it’s supposed to do. The problem is a lot of the sales are not being properly illustrated because regulators gave agents, they let them illustrate the rates too high, and that drives the narrative too much, and so even if those rates are achievable, even a client to actually get those rates… That shouldn’t be the reason for the purchase, and I think unfortunately, too often that is the reason for the purchase.

0:29:32.2 SARA GRILLO: Do you think the agents who are selling it actually understand a lot of the technicalities that you just went over.

0:29:40.0 BOBBY SAMUELSON: It depends on what age you’re talking about, there’s definitely a crew of sophisticated agents who have sold this for years, and I think understand with a pretty high level of depth how this thing works, and they’ve bought into it, that’s maybe 3% of the agents to sell this product. I think the other 97% of agents to sell this product are doing it because they see the old traded performance, they see people making a lot of money selling it, they understand the basic positioning, which is none of these things that I’m about to say are true but what they say is, you can’t lose money, you’re gonna perform better than equities, you’re this this, this the super safe insurance company, long-term history of performance, none of these things are actually… Maybe the insurance company of pies, but the rest of it is not true. And so tax free guaranteed in, and I’ve heard that story for that… Ulta, incorrect. And so I think a lot of times when you look at Il and why it’s being sold, there’s a narrative, and that narrative doesn’t really match up to reality, but there is in a lot of cases, but there is a real narrative that really does do the product justice, and that really can benefit clients, it just isn’t nearly as sexy of some of this other stuff that we see on tithes, the gap between the real benefits of the product and what’s being shown out of the marketplace.

0:30:59.1 BOBBY SAMUELSON: And again, I think the vast majority of that comes back to illustrated performance and aggressively illustrated scenarios for clients that they get attracted to.

0:31:07.3 SARA GRILLO: Clients don’t understand it, some advisors don’t understand it, some agents don’t, it… This is where the industry gets a bad name, and I say that in the hopes that myself included, all of us that are listening to this, can strive for more transparency, more clarity, and a much stronger understanding of this and all other complex products, because this is where people lose faith in us.

0:31:33.3 BOBBY SAMUELSON: Yeah, well, and… Look, we’ve seen this movie before. So when you kind of stretch back and look over history, UL was popular in the 80s because it illustrated very aggressively, people thought they were buying a cheap product, what they didn’t realize was if interest rates go down, their premiums must go up, that’s not what the agents told them that’s not what the expectation was, but that is how the product actually works, so again, even with UL in the 80s, there’s a difference between the marketing story and the illustration story and how the product actually works. Then we had L in the 90s, what was happening with that company agents were illustrating ultra high rates, very cheap premiums, clients that understand that if their equities didn’t perform, the policy could be imperiled, and yet that’s what happened. So those are two big black eyes for the industry, an advantage in premium whole life, even before universal, a similar phenomenon. So we’ve always… In life insurance had this problem of people talking about insurance as an investment, which they are legally not supposed to do, and positioning it as an investment and talking about it in ways that are completely inappropriate based really on illustrated performance and the fact of what the product actually does, and actually, there’s a great book about this, it’s called the story of life insurance by Burton Hendrick, and he talks about the insurance industry in the US in the 1800s, and guess what? Same phenomenon was going on, there was this concept of a canteen whole life that illustrated the best returns, everybody got into them, it turned into a huge scandal, and so we have had this constant issue in life insurance forever, and I is just the latest flavor of it, of a product that’s being positioned and sold as an investment and being touted as having X, Y, Z performance…

0:33:17.0 BOBBY SAMUELSON: Well, it still was a fundamentally sound product, it’s just different than what’s being positioned to market, and that gap is what causes black eyes for the industry, and like you said, we’re setting ourselves up for this with UL, and we’ve done it plenty of times in the past, to… This is not the first time.

0:33:31.2 SARA GRILLO: Okay, what resources have you availed yourself of, they can provide us with more knowledge and transparency as a fee-only advisors or the advisors that are listening to this.

0:33:43.1 BOBBY SAMUELSON: Yeah, yeah, well, I’m not an agent, just again, just to be clear, and so in a lot of ways, my resources are not the resources that an agent would use, I build insurance products with insurance companies, I write about all the issues we’re talking about. And so

0:33:56.9 SARA GRILLO: We… Hold on a sec, I’m sorry. You write about these issues. Oh yeah. Is this blog able to be consumed by the public…

0:34:06.9 BOBBY SAMUELSON: No, I charge for it, and it’s a technical weekly newsletter on anything and everything going on in the life insurance space, and so it’s written for high-end insurance professionals, high-end financial advisors who really wanna understand what their clients are being sold. So I do have a lot, I do have RAs that sign up, it’s written for insurance company executives as they’re thinking about developing products, it’s written for brokerages, and so it really is… It’s a technical deep dive. And look, I wish I could say there are a lot of other great resources out there to learn about all these issues, and the reality is nobody wants to write about life insurance, it seems except for me, and so in terms of product issues, and so I’d say my newsletter to the Lieber IE is the best known and best subscribed technical product industry resource covering what’s actually happening in the marketplace. And outside of what I do, charms, a great life insurance, especially on the annuity side, the Society of actuaries has stuff on their website you can read, but again, very technical and geared towards the actuarial side. There are some other folks who I think there are some other bloggers, Chris Patrick, I think it’s done a good job of talking about um…

0:35:17.4 BOBBY SAMUELSON: There’s some pro-IL folks who I think I actually do a good job there, but there are some that do it the right way, and I think do a good job of trying to get rid of the misinformation, so I say Look around, but if you want real technical product-oriented stuff, that’s what my newsletter does, and again, it’s the only off… That’s the only thing out there that covers it the way that I do.

0:35:36.6 SARA GRILLO: If you talk to a real high-end advisor who works with families that have a ton of wealth, like 50 million and above family offices, etcetera, they’re having their clients in 40000 a year, premium products.

0:35:51.8 BOBBY SAMUELSON: If not way more than that. Yeah.

0:35:53.3 SARA GRILLO: They have to grasp the high details that you’re talking about, they have to be experts or they have to work with somebody who is an Asian. And trust that that person is gonna give them a fair deal, which is scary as

0:36:08.8 BOBBY SAMUELSON: Back… And that’s what I see most of the time. I meet very, very few people. So my background is I started… My dad’s an agent, my granddad is an agent, and I started at a brokerage firm working exclusively with ultra high end… We had very ultra-hi. And agents and their clients, we had a unit that I worked in at this firm that only dealt with premiums above 250000 a year, and we were slam… I’ve seen cases with 5 million year premiums, 3 million year premium seem on a pretty regular basis too, but here’s the thing that I think is really important, Sarada, lot of people don’t get… The higher up you go in the market, the more trust matters, and what I see is a lot of family offices, a lot of RAs, a lot of estate planning attorneys, referring a trusted insurance advisor in and the client saying, Hey, I trust the use advisors. These advisors certify this guy, I’m gonna trust him too, and I’m gonna do whatever he tells me, so there’s an inverse relationship between the number of questions you typically get about a deal and the client’s network, the lower…

0:37:18.6 BOBBY SAMUELSON: The client’s not worth… That’s where I’ve found some very sophisticated buyers who really took their time to understand the product and content, there’s a canal who subscribes my newsletter, who bought a life insurance policy, went on a two-year quest to understand it and ended up becoming an agent and subscribing to my newsletter, as a result of that, he went, but he’s a lower net worth guy, on the flip side, I’ve seen billionaires just sign the dotted line and do the deal, and they don’t even ask any questions. And so what I’d say to your point, it’s like, these advisors who are at the top and working with larger clients, you must do your due diligence, you have to do not assume that even if this agent comes with great referrals, even if this agent has a long track record, even playing off of the guy for years, do not assume that the insurance proposal he’s putting in front of your client is the one that best fits that client, do not make that as there are great agents out there, and they are… Our agents out there who do stuff that I don’t think is that great, and it is really hard to tell the difference, and so you actually look at what they’re putting in front of clients, and that is where the rubber hits the road, and so yeah, I completely agree with you, folks in a position to advise high it with clients, you don’t need to become an expert, but you need to be conversant in life insurance, and you need to say a truism here, and it looks so good to be true.

0:38:37.4 BOBBY SAMUELSON: Not it probably is. It definitely is, and you have to look at that on Indira proposals being shown to clients and screen, because if you don’t… What we’re seeing right now is a lot of class actual lawsuits, a lot of very nasty situations, class actions on one side to a lot of individual lawsuits that are very nasty situations with very high net worth people who bought stuff they didn’t understand and got hosed and now they’re looking for blood

0:39:01.5 SARA GRILLO: Test for them too, it’s just a sad situation all around.

0:39:08.3 BOBBY SAMUELSON: Yeah, it is, it’s sad all around, but it’s becoming increasingly common, there were certain types of deals that worked for the last 10 years and are not working right now, and those deals… That’s where the problem comes in. And that’s happening more often that people think…

0:39:24.8 SARA GRILLO: Well, I also… Everyone listening, I also want to mention the Andy panos doing, it’s called the ill experiment. Well, you’ve seen the website and… Yeah, the Andy actually bought an IU policy and he’s taking us with him on his journey, he has a whole website that goes over all the documents that he got when he bought it and… It’s absolutely phenomenal.

0:39:50.2 BOBBY SAMUELSON: I love it. I think Andy is doing a great service to everyone by going through this himself, and my prediction is in the long run that… Ali’s gonna look a lot like it. If he bought a U-L, I think I’ll be happy with it. But it’s not gonna be the stock market in

0:40:07.4 SARA GRILLO: Yellow, what I just mentioned it, and Andy’s been on my podcast before, and we’re colleagues, but I’m mentioning this because it’s inspiring in the sense that he’s really doing the work, and I just would encourage everybody to follow that, example.

0:40:37.6 BOBBY SAMUELSON: Yeah, I agree. And look, that’s what I do with my newsletter, I do the work, I read the filings are the illustrations, I talked to insurance company executives, I talk… Agents call me all the time. You gotta do the work. And I don’t have a real job. My job is just products, and so if you’re an agent or you’re an advisor, it’s really hard for you to stay on top of all these issues, and so I think Andy is doing a good job of putting some stuff out there, but again… And that’s my goal with like Pieter IE is my job is to look into all this stuff and then communicate it in the way that people can understand it, that’s what

0:41:09.3 SARA GRILLO: I do. They find that publication.

0:41:12.0 BOBBY SAMUELSON: Yeah, it’s called, it’s called the Life Product Review. You just go to www, lifetou, 350 articles on there. And so if you sign up, you get access to all of them, they’re all about 3000 words of pot, so carve out a couple of weeks and have at it, boy.

0:41:28.5 SARA GRILLO: Okay, awesome. Well, Bobby, thank you for all that you’re doing. And like I said, I think we should all be honest, transparency journey for the good of the clients through the industry, and to just have integrity with what we do, all of us advisors, agents, marketing vendors like me, everybody really, that is involved with this in any way, so thank you so much for being here. And Bobby, how would you like people to contact you if they

0:41:53.3 BOBBY SAMUELSON: Go to my website, like I said, life product review dot com. That’s the best way to find me. Thank you and thank you for what you’re doing to… We need more transparency and I appreciate what you’re doing. 0:42:03.8 SARA GRILLO: Well, you’re very welcome and I need to do a lot more, so I would love to just believe that we’re just getting started with this. I agree. Thank sir. Alright, everybody, so Thanks, Bobby again, and everybody, please subscribe and review this show, just a reminder that nothing in this podcast can be interpreted as a product, insurance or investment recommendation of any sort, nothing in this podcast can be interpreted as legal or compliance advice, or any recommendations specific to your or your client’s personal situations, please consult a consultant, advisor or attorney.

Disclosures

Grillo Investment Management, LLC does not guarantee any specific level of performance, the success of any strategy that Grillo Investment Management, LLC may use, or the success of any program.

Transcript may differ from original recording

SourcesAllstate. What is Universal Life Insurance? https://www.allstate.com/resources/life-insurance/universal-life-insurance

Fernando, Jason. (31 March, 2023) What is a Call Option and How to ouse it with example. Investopedia. https://www.investopedia.com/terms/c/calloption.asp

Martin, Tom. (2015, April 6th). ThinkAdvisor. How (and why) indexed universal life really works. https://www.thinkadvisor.com/2015/04/06/how-and-why-indexed-universal-life-really-works/

Pfeifer, Timothy C. (2015, September 11th) Actuarial Guideline 49: What You Need to Know. Premier Brokerage Services. https://premierbrokerage.com/actuarial-guideline-49-what-you-need-to-know/

The post Blunt, unfiltered truth about Indexed Universal Life appeared first on Sara Grillo.

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It seems like everyone from the Senate Banking Committee to Reddit forums, everyone is buzzing about crypto this and crypto that. Today we’re gonna WAKA WAKA BREAK IT DOWN to the question, “Is crypto a good investment or is it as valueless as a rock?” and you can bet that this is going to be a live one!

For those of you who are new to my blog/podcast, my name is Sara. I am a CFA® charterholder and I used to be a financial advisor. I have a weekly newsletter in which I talk about financial advisor lead generation topics which is best described as “fun and irreverent.” So please subscribe!

I am an irreverent and fun marketing conWe’ve got a great party crew here today.

On the “For” crypto side:

Robert Wright, Financial Planning Professional at Advocacy Wealth

James Giles , crypto product manager at Nerd United, a venture studio that works with seed and pre-seed crypto start ups

Dr. Steven Lee, Lecturer at California State Polytechnic University-Pomona

Against crypto:

Josh Gonzalez, financial advisor with Modern Wealth Strategies

Scott Salaske, my ride or die homeboy,

And me, I’ll try to stay neutral but I’ll tell you that I’m not crypto fan.

And let’s get on with it!

Is cryptocurrency a currency or a commodity?Opinions were:

Lee: You can actually be a vendor of any kind accepting cryptocurrency, as long as you go through the formalities. As long as that is true he has a hard time accepting that it could be a security, and he sees it as a medium of exchange.

Gonzalez – When people buy cryptocurrency, they are buying it hoping to get out of it and realize a gain. People are buying it as a unit of speculation. Most people never buy it as a unit of exchange.

Salaske: It’s not a security or a currency either. There is no underlying asset that drives the value. It’s not a currency because it’s not pegged to an underlying currency and if it were, you would just buy the underlying currency. It’s just the enthusiasts who are enthusiastic about it, not the average person.

“It’s just basically nothing.”

-Scott Salaske

Giles: There are different factions within crypto. With Bitcoin, some people buy it for speculative reasons. It may be better to look at it like precious metals almost like a commodity. We’d have to discuss on a case by case basis.

Giles asks, what do you say about the US dollar if you think crypto is “nothing” – (to quote Salaske).

At which point Gonzalez jumped in and said that the libertarians used to make the same arguments that crypto enthusiasts make now – that fiat currency is a fraud, there is no underlying value, and they print it out of thin air but there’s a finite amount of bitcoin. According to Gonzalez, the US dollar works because (despite that the Fed can print whatever amount it wants), you don’t have to acculturate them to an app and some digital platform. It is a social construct and there is no underlying value, but it works because everybody believes that it works.

Is crypto a good investment, or does it suck?Salaske: It sucks

What’s the point of it? It’s not an asset so why would you hold it? It’s not a currency but why would anybody want to transact in it on a day to day basis. Maybe Stablecoins will develop. But to own crypto…

Wright: Is gold an asset?

Salaske: No, I don’t buy gold. It’s a rock.

“Any metals or anything else. It’s a rock. Use them as a doorstep. They keep up with inflation over time. That’s it.”

-Scott Salaske

Salaske says that it would be have to have a growth driver or utility, or else it would be like picking up a rock and putting it into your portfolio.

Gonzalez shoots back that metals have industrial applications and telecom lines wouldn’t work without them.

Wright: So if gold is something a client could be invested in and potentially suitably recommended by an advisor, what is the argument against Bitcoin?

Wright argues that we could diminish any asset that way, even stock certificates. Gold has transaction value. All value is relative. It is what one person determines with another person engaging in a market. Now we have a version of gold that doesn’t have the problems that gold does. It won’t cost alot of fuel to transact and settle transactions. Bitcoin can act in that matter. How can you say it doesn’t have utility value?

Lee: Would you be saying the same thing about gold if we rewound the clocks and went back to the Gold Standard?

Salaske rebuts back that gold had a value at that time and it could be used for something. There is a lack of substance backing crypto.

How should crypto be regulated?Wright: There is a common misconception that crypto isn’t regulated. That’s false. Gary Gensler has stated that there is nothing different about crypto under the Securities Act. If it’s not regulated then why are people being prosecuted? Kardashian, etc.

I’d say they prefer ambiguity. The reason is that it allows them to prosecute people based on that ambiguity. Because if they came out and just said, “Hey, it’s exactly the same. There’s no difference. We have to follow the Securities Act [of 1933]. But they benefit from the ambiguity.

They prefer to be able to put the gun in the ribs vs. having some clear way that people can operate around these [cryptocurrencies.]

-Robert Wright, CFP

Lee: The list of things Gary Gensler doesn’t own is probably very short.

Wright: I would prefer they didn’t regulate, and how would they even regulate it other than love notes in the air?

Grillo: So how do we stop the massive collapses like FTX?

Giles: If the SEC could get its act together, it would prevent crypto from being driven offshore.

Wright: We should separate custody from the ability to provide investment advice on those assets. This would decrease the potential for conflicts of interest. FTX custodied everyone’s assets. That is how they were able to pull that off. They said, you have to exchange your dollars for our tokens to be able to trade on our exchange.

Lee: That’s the first thing the fraud examiners say. If you don’t want fraud to go on, you have to separate out all the responsibilities.

Is crypto a real innovation?Gonzalez: We have Visa, Mastercard, ACH – is this really an innovation? Or is it a solution in search of a problem?

Our payment structure has not been innovated in nearly 50 years.

-James Giles

Gonzalez: We should focus on the rank and file average person. Because they are the people coming to advisors. Bitcoin can not reconcile transactions in the way that Visa and Mastercard Can.

Giles: Yes and no. As a Layer 1 protocol, no. Visa and Mastercard and starting to admit how slow and clunky it is for merchants. The technology is being built to move to crypto rails.

Lee: I would be a fan of separating out blockchain technology from cryptocurrency. I don’t want to trash Central Banking, but now that we have blockchain technology we could replace it. When you look at the individual person, it’s not helpful when Visa or Mastercard says we sent you the money, it’s going to be 2-3 business days before you receive it. Blockchain would make it quicker. That is a huge area of potential. I would like to see us move off of Central Banking. Having 12 districts is not decentralized. It’s not decentralized. With blockchain we could do that. We could do that with Fiat currencies and not necessarily crypto. I’m fine with jettisoning the coins.

We need to do something with this Central Banking nonsense. It’s outlived its usefulness.

– Dr. Steven Lee

Wright: Dr. Lee is arguing that we need sovereign money. If you have the wrong political views, access to your bank account could be at risk. That’s crazy. I would argue that bitcoin is a huge part of that blockchain technology because you do need to have something you could exchange in value.

“Saying that one person can control bitcoin is like saying that one person can control the sun. It’s a completely decentralized project.”

– Robert Wright, CFP

For someone to be able to send payments overseas, bitcoin and cryptocurrencies help with that.

Grillo: But isn’t cryptocurrency the currency of choice for ransomware?

Wright: So is cash.

Grillo: But banks can’t custody dollars without following anti-money laundering standards.

Wright: It’s still illegal to launder money it’s that the regulators don’t have the capability to intercept.

Giles: Banks do have to follow rules and regulations. What we’ve seen in 2022 is that there were a number of hacks. Hackers take funds but they can’t offload it and exchange for fiat. It’s started to incentivize white hat hacking, where they return most of the funds back and keep the fee, because they can’t do anything with it.

How do we prevent the spread of misinformation about crypto?Grillo: What do we do about all the malfeasances and endorsements that make crypto frauds worse?

It’s speaks to how deeply the entire enterprise is fraught with corruption and scam. What good is going to come of this? You talk about theoretical applications but in the real world crypto has done more harm than good so far.

– Josh Gonzalez, CFP

Wright: This happens in pharma as well. I don’t know there is ever a capacity where you can eliminate that entirely. This is where advisors would do better if we are held to a clinical standard. We can assess the risk tolerance and help keep people out and hopefully people will listen to use instead of the celebrities.

In order to make this work, we have to figure out regulation and fraud. Those are the two main hurdles. –

Dr. Steven Lee

Lee: What are we going to do about Reddit? It’s a problem and it seems like the SEC is just picking and choosing who to go after. The problem exists with traditional assets. It comes down to financial literacy and investor education.

So is crypto a good investment or just a rock?Did our debate inspire your thought to change?

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BiographiesScott Salaske

James Giles

James is the father of three energetic boys and 1 Bernadoodle: Oliver, Henry, William, and Louie; and husband to Anya Giles since 2017. They love to travel, bake, and swim.

Joshua Gonzalez

As a Financial Adviser, Josh provides a wide range of personalized, comprehensive financial planning services to his clients, including retirement planning, investment advice, and estate planning.

Josh has over a decade of experience crafting, implementing, and monitoring financial plans for affluent households and small- to medium-sized businesses. He graduated from the George Washington University cum laude. In addition to the CFP® mark, he also earned the Chartered Financial Consultant (ChFC®) and Chartered Life Underwriter (CLU®) designations from the American College of Financial Services.

Throughout his career, Josh has been recognized for his outstanding talents and expertise. In 2019, the American College of Financial Services named Josh as one of five NextGen Financial Services Professionals of the Year. He has earned a place in New York Life’s President’s Council twice in his career and has been invited to Executive Council in all other years.

In addition to his service on the American College Alumni Council, Josh has volunteered on the GW Alumni Association Board and has been recognized for his financial contributions to the GW student body and alumni communities.

Robert Wright

In addition to his formal Education Robert Wright holds his FINRA Series 7 and 66 licenses, is a CERTIFIED FINANCIAL PLANNER Professional and holds Georgia Resident Life and Health Insurance License.

Robert is also an Instructor of CFP® Coursework for the College of Financial Planning Online and on Campus at Kennesaw State University.

Dr. Steven Lee

Podcast transcription and summary may differ from original recording and Grillo Investment Management, LLC may not be held liable for such differences.

The post Crypto – just a rock, or a good investment? (debate got wild) appeared first on Sara Grillo.

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So where’s the spot bitcoin ETF and what’s up with these crypto ETFs in general? Will the SPY lose its crown this year? Are semi-transparent ETFs are raw deal? This episode we’re going to be talking about 2023 ETF trends and I thrilled to have some of industry’s most knowledgeable people here to rap about it all: Nate Geraci, host of ETF Prime podcast and President of the ETF Store, and Phil Bak, founder of Armada ETFs.

I wanted to have this talk because a lot of advisors just look at ETFs as well, kinda just there. There’s a lot under the surface though and that is what we are going to talk about today so let’s get onto the show!

We’ll discuss:

Will the SPY become dethroned?
What exactly is a spot bitcoin ETF and how is it different from a futures bitcoin ETF?
Do ESG funds suck? (YES!!!)
What’s up with these semi-transparent ETFs?
Small ETFs – worth it or too much of a risk?

I am an irreverent and fun marketing consultant for financial advisors. Are we in a market regime shift?ETFS can be thought of as a wrapper around an investment strategy. There are so many that when you talk about ETFs you are really talking about what is happening with the economy on a macro level. But in 2022, stocks and bonds went down together and displayed high correlation, suggesting a failure of modern portfolio theory.

In 2023, we are coming out of a market regime we have been in since the recession. You could put your money in to US equities, large cap market cap weighted, and that is where the bulk of market flows have gone. Investors may have to think harder about how they are allocated. Alternative asset classes, physical gold, different realms of fixed income, ETFs that use options strategies for downside protection, and other innovative ETFs may become more popular.

It may be time to rethink fundamental portfolio construction…

Semi-transparent ETFsGeraci is not bullish at all on semi-transparent ETFs. He feels the daily, full transparency of the ETF wrapper is a huge benefit to investors. Active managers though are worried about having their “secret sauce” made public. Geraci feels those concerns are overstated. Active managers have been evidenced to generate outperformance in an ETF wrapper. There is absolutely the opportunity for front running and slippage but Geraci doesn’t think it matters.

Bak says that before Cathie Wood, there was the belief that you couldn’t really succeed as an active manager using ETFs because of front running; but she disproved all of that.

Quick take: what is a bid-ask spread for an ETF?The way an ETF trades, there is a value based intrinsically on the underlying assets. If we believe it is worth $25, there may be a bid (amount the buyer is willing to pay) of $24.98, and an offer(ask price) of $25.03 from the seller. There is a spread that is the hedging cost of the market maker. Investors can play the spread any number of ways, but that is basically what keeps the ETF in line with its value.

Transparency for the industry has been a good thing because it has kept ETFs trading in line.

Low-cost ETFs steal the show!SPY turned 30 this year. It may be overtaken by IVV which trails it by about $70BB in AUM. If you look at flows over the last few years, money is coming out of SPY and into VOO and IVV and Geraci believes it is due to the expense ratios being lower.

SPY, at the time of recording this podcast, was at $369 billion. VOO is at $271, VTI is at $274, and IVV is at $300. Bak believes that if the market is down and there is an opportunity to tax loss harvest, there may be an exodus from SPY.

But if there is a Fed pivot leading to market rally, Bak says, the greatest beneficiary will be small caps. SPY’s crown may be taken by VTI in that case.

Will 2023 be the year for physical gold ETFs?Geraci is puzzled by the fact that in 2022, every single asset class other than commodities went down, and gold was only down by 2% yet there were not major inflows. There were a laundry list of crypto scams in 2022. Bitcoin was referred to as “digital gold”. Geraci posits that some investors may go for actual gold instead of digital gold in search of an uncorrelated asset if a weaker dollar and inflationary concerns persist.

Iran and Russia are working together to create a Stablecoin backed by physical gold. According to Bak, assets don’t care about the ethics of their investors. If they are going to be transacting oil on a gold-backed derivative, that may have an impact.

The spot Bitcoin ETF – come out, come out wherever you are!Multiple issuers have attempted to bring a spot bitcoin ETF to market, and the SEC has shot them down. In October of 2021, ProShares was successful in bringing the first futures-based ETFs to market. These ETFs have tracked the spot price of bitcoin pretty well.

The SEC won’t allow a spot bitcoin ETF to come to market, but it has allowed bitcoin future ETFS to. The problem is that if you look at where the CME-traded bitcoin futures get their references prices from, they get it from the exact same exchanges that a spot bitcoin ETF would.

They are taking pricing cues from the same place!

The SEC is scared of fraud and manipulation from these exchanges, but it doesn’t seem to make sense which is why Grayscale sued them.

But as of today, a spot bitcoin ETF doesn’t exist, and for this reason people have resorted to other sources to get bitcoin exposure, such as the Grayscale Bitcoin Trust, a private trust that trades over the counter. This traded at one point at a premium and now trades at a large discount. It has not done a good job of tracking the spot price of bitcoin. Or they invest in bitcoin on their own using self-storage (at the risk of losing their keys).

It looks like the SEC wants full oversight of the crypto exchanges and until that happens it’s unlikely we’ll see a spot bitcoin ETF.

Quick take: how does a bitcoin futures contract work?A bitcoin futures contract gives you the right to purchase bitcoin at some point in the future at a certain price. You may buy it in January with the right to purchase bitcoin at the price that prevails for the asset in February or March, for example. When you hold a bitcoin futures, you are essentially speculating on what the price of the asset will be at that point in time.

As the futures get closer to the maturity date, the futures price essentially converges to what the spot price is at that time.

Quick take: How do you roll a bitcoin futures contract?Bitcoin futures ETFs will roll the futures contracts month to month. When the futures curve is in contango, in which the far away months are higher than the near months, you have what is called a negative roll.

You are essentially selling low and buying high (remember you are buying bitcoin at the spot price that persist when the contract matures). This can be a huge headwind for returns in a bitcoin futures ETF.

The point is that long term a bitcoin futures ETF is probably going to trail the spot price of bitcoin, which is what Geraci says he’s seen with other futures-based ETFs.

Morgan Stanley disappointingly issuing ETFsMorgan Stanley has started rolling out their own ETFs and the first wave is ESG funds. The worst part is that their wealth management clients’ portfolios will be stuffed with this crap. The core ETFs will likely follow this initial crap-based offering.

ESG sucks for the following reasons:

The ratings agencies don’t even agree on whether or not a stock is an ESG stock or not.
ESG is not a primary market transaction which would have influence over a company. It is a second market transaction which is conducted between shareholders and has little if any impact. The shares are already issued and the company doesn’t care unless the stock price goes so low that it gets delisted.
If a good company goes down the hedge funds who don’t care about ESG will buy it back up.
It puts the investment manager in charge as the arbiter of morality for virtue points, which is hard to do at a top-down level as opposed to an issue-specific level.
The markets are a natural ESG screener anyways. If you have an issue with something a publicly traded company does, stop using their products and then their earnings will go down.
Investment managers are smart and pay attention to ESG risks such as litigation. They just don’t call them ESG risks.

Is the bias against smaller ETF issuers flawed?The liquidity of a small ETF is fine as long as the underlying liquidity of whatever it holds is fine. Many people have a $100MM threshold when it comes to investing in ETFs.

The idea that we can only invest in large funds by the largest issuers is suppressing innovation. It also creates a systemic risk because everyone is in the same funds or another. There is always more liquidity on the way in than the way out.

People say that ETFs are the Silicon Valley of asset management. There are no better entrepreneurs in the industry. The problem is that if a smaller ETF has some success, the larger issuers will come in and offer it at a lower price due to the scale that they have.

Sara’s upshot on crypto ETFs and other trendsWhat’d ya think of my show on crypto ETFs and other 2023 trends? Was this helpful?

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BiographiesAbout Phil Bak

Phil is the Founder/CEO of atNav, an early stage capital markets technology company. Phil has previously served as the Founder/CEO of Exponential ETFs (acquired by Toroso Investments), Chief Investment Officer of Signal Advisors, and Managing Director at NYSE.

Phil is the author of two patents on innovative ETF structures, has led market structure enhancements that have become industry standard, and pioneered new investment strategies into the market. Phil has been featured in top-tier media outlets such as the Wall Street Journal, Bloomberg, CNBC, Financial Times and Reuters.

Phil holds the Chartered Alternative Investment Analyst (CAIA) designation and is the host of The ETF Experience and the Phil Bak Podcast. Read him on Substack at: https://philbak.substack.com/

About Nate Geraci

Nate helped launch The ETF Store, Inc., nationally recognized as the first investment advisor to offer only Exchange Traded Funds. He is also creator and host of the weekly podcast “ETF Prime”, which Bloomberg has called one of the “most helpful plain-English resources for investors who want to demystify exchange-traded funds”. Nate is Co-Founder of The ETF Institute, the first and only independent organization providing ETF industry professionals and financial advisors with certification, education, and training pertaining to ETFs.

Nate is regularly quoted in various national publications including Bloomberg, Business Insider, The Wall Street Journal, Financial Times, and CNBC, has appeared on Bloomberg Radio & TV, and was named one of Ingram’s 2013 “40 Under Forty” in Kansas City. Nate also serves as a board member for the Kansas Council for Economic Education.

He earned both his undergraduate degree in Business Administration and his MBA from the University of Kansas. He holds Series 7 and 65 Securities Licenses in addition to a Life & Health Insurance License.

DisclosuresGrillo Investment Management, LLC does not guarantee any specific level of performance, the success of any strategy that Grillo Investment Management, LLC may use or mention in any of its content, or the success of any program it may mention in any of its content. Grillo Investment Management, LLC will strive to maintain current information however it may become out of date. Grillo Investment Management, LLC is under no obligation to advise users of subsequent changes to statements or information contained herein. This information is general in nature; for specific advice applicable to your current situation please contact a consultant or advisor. I want to be clear that nothing in this podcast or blog can be interpreted as an investment recommendation of any type. The opinions expressed herein do not necessarily represent the views of Sara Grillo or Grillo Investment Management, LLC. Also, nothing in this podcast or blog can be interpreted as legal or compliance advice. For advise on such matters, contact a legal or compliance advisor. Any similarities to persons deceased or alive are entirely coincidental.

Sara Grillo owns shares of Tesla, (ticker: TSLA) and iShares Core S&P 500 ETF (ticker: IVV) , in her personal account at the time of this blog being published.

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ESG sucks. In this podcast we’re going to talk about why ESG is a rip-off and nothing more than a way for Wall Street to earn higher fees off unsuspecting people who mean well. Don’t let your clients get taken! Listen to this show.

In this podcast we are going to expose the truth about ESG investing. I am joined by Eric Balchunas who is a Senior ETF Analyst at Bloomberg and the author of “The Bogle Effect.” And also Dr. Ellen Quigley, Special Adviser to the Chief Financial Officer (Responsible Investment), University of Cambridge and Senior Research Associate (Climate Risk & Sustainable Finance), Centre for the Study of Existential Risk, University of Cambridge.

I am an irreverent and fun marketing consultant for financial advisors.ESG vocabBefore we get into it, let’s start with some basic definitions:

- ESG: ESG stands for “Environmental, Social, and Governance” and it’s a style of investing that purports (but does not, in reality) save the world from its evils. Governance is an unhelpful tack on, according to Dr. Quigley, usually viewed as unrelated to the first two related to things like board composition etc.
- SRI: Socially Responsible Investing. This is a restrictive type of investing that aims to avoid directing funds into sin investments such as tobacco, etc., through use of screens.
- Impact investing: A private investment in a company, made in the spirit of saving the world.
- Brown stocks (also called “dirty” or “fossil”) vs. Green stocks. A pure play fossil fuel company would be brown whereas a pure play wind turbine company would be viewed as green.

https://www.youtube.com/watch?v=t72WBmwkdEYReasons why ESG sucksThe following are reasons why we believe that ESG is a bad investment strategy.

1. It’s active investing done badly.

By excluding certain types of stocks, you make it more likely you’ll underperform.

According to an article by Larry Swedroe from 2016, controversial investments yield post abnormal returns, generally, and screening them out causes performance to suffer. Swedroe cites a study by Greg Richey from the Summer 2016 issue of The Journal of Investing. Richey’s research found that found a “Vice Fund” produced a greater risk-adjusted return over the market portfolio (Richey, 2016, as per Swedroe, 2016).

With all the moral propaganda and pulling on the heart strings, it’s easy to overlook that ESG, at its core, is an active management strategy that comes, generally, with higher fees (we’ll get to that later) with performance that doesn’t justify them.

It’s the concept of “slactivism”, according to Balchunas: you want to do something good, but you don’t want to exert too much of an effort.

Dr. Quigley says that it’s like rearranging deck chairs on the Titanic, because if you look at the effect that climate change will have on your portfolio overall in the long term, it dwarfs the impact of higher fees anyways, whether or not ESG investing actually works.

2. Secondary market trading doesn’t really impact the company.

The idea that market participants can voluntarily change overarching global problems by the force of their market behavior is a flawed premise that sounds good but doesn’t hold up.

These are key points that many financial advisors do not understand.

First of all, Secondary market trading doesn’t really impact the company. It’s just exchange of shares. Your money goes to a different shareholder. It does not go to Apple’s checking account.

Secondly, The ”bad companies” who are the offenders already have enough capital. They aren’t issuing shares to fund their operations. In fact, they are probably net buyers of shares. The giant companies are sitting on massive cash piles; Apple is sitting on 202bb in cash. According to Yardeni Research, there was $200B of buybacks in Q2 2022 for S&P stocks (which boosts the price).

Source: Standard & Poors, YardeniAnd guess what else!

The massive cash pile held by just 13 companies accounts for nearly 40% of the $2.7 trillion held by all of the companies in the S&P 500. S&P 500 companies now have enough cash to give $8,131 to every man, woman and child in the U.S.

-Investor’s Business Daily, February 3, 2022

Ehem.

Third, share prices dropping doesn’t tick off the executives who hold large amounts of company stock because often their compensation is determined by the number, not price, of shares. If the company were to become delisted from an exchange, or if they are voted out by proxy, the directors may become embarrassed, fear of which may be a bigger motivator of good behavior.

Lastly, markets are competitive and there are certain types of investors who will look at a company with good cash flow selling at a depressed price and buy shares on fundamentals, even if it is a moral offender. The price will rebound. It takes an unrealistic amount of divestment to have a real effect on a company.

According to Dr. Quigley, 90% of capital raising happens through the bond market. That is where the money flowing into fossil fuels comes from. If you are going to have exclusions, the bond side is much more likely to have an effect. Bond issuances, not secondary market trading in public equities, would have an effect. Public traded equity is not new money, unlike bond issuances.

3. ESG signaling and wokeness are destroying corporate America.

Here’s why I hate ESG ratings.

It’s unclear who the good and bad stocks are because ESG scores are just meaningless signaling. There’s no universal meaning. The ratings are assigned by different companies in a way that is too different. It’s not like in the corporate bond market where we have Fitch, Moody’s, and S&P ratings agencies. There is a huge disparity from one to the next in ESG scores. Two examples of companies who assign ESG scores are SASB and Refinitiv.

Also, ESG scoring is nothing more than a funding tool. Companies have to signal that they are “woke” and consistent with progressive values in order to get funding. It’s more an indication of what your CEO tweets about than the actual virtue or vice of the company’s behavior.

This lack of fairness, transparency, objectivity and the ideology the enshrines the offering up of stock market competitiveness as a sacrificial cow of wokeness is yet another reason why ESG sucks.

4. ESG fees are Wall Street ripping off the consumer

Yet another reason why ESG investing is a bad idea – the fees!

Plain old index funds suck for Wall Street because they decimate the fees they get. But by sneaking in active management in the form of ESG, Wall Street gets another crack at shaving off a higher level of fees from the unsuspecting consumer.

Research shows that ESG comes with higher fees, so much so that it may be better to take fee savings and donate it to a charity that has impact than actually invest in an ESG fund and pay the higher fees.

From a Wall Street Journal Article:

The environmental, social, and governance funds’ average fee was 0.2% at the end of 2020, while standard ETFs that invest in U.S. large-cap stocks had a 0.14% fee on average.

-Wursthorn, 2021, as per Sullivan, 2021

Did we convince you that ESG sucks (yet)?Thanks for reading our blog about the drawbacks of ESG investing. We hope you’ll run in the other direction now that you know the truth about ESG.

I hope you’ll subscribe to my newsletter.

Join our next Transparent Advisor virtual meetup.

These meetups are free and the goal is to learn from each other about how to grow and manage a transparent practice for the benefit of clients.

Even if you can not make the meetup, or even attend in its entirety, please register for the replay and to be notified of the next one.

Our scheduled meetups are here:

March 8th, 2023

April 12th, 2023

May 10th, 2023

June 14th, 2023

July 12th, 2023

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September 13th, 2023

October 11th, 2023

November 8th, 2023

December 12th, 2023

You could also consider my financial advisor social media membership which teaches financial advisors how to get new clients and leads from LinkedIn.

Thanks for reading. I hope you’ll at least join my weekly newsletter about financial advisor lead generation.

See you in the next one!

-Sara G

SourcesKrantz, Matt. (9 February, 2022) Investor’s Business Daily. 13 Firms Hoard $1 Trillion In Cash (We’re Looking At You Big Tech). https://www.investors.com/etfs-and-funds/sectors/sp500-companies-stockpile-1-trillion-cash-investors-want-it/

Richey, Greg. (2016, May). Sin Is In: An Alternative to Socially Responsible Investing.? Journal of Investing, 25(2):136-143. DOI:10.3905/joi.2016.25.2.136. https://www.researchgate.net/publication/303634950_Sin_Is_In_An_Alternative_to_Socially_Responsible_Investing

Sullivan, John. (2021, March 16). 401k Specialist. Sustainable Scam: Is ESG About Responsibility or Higher Fees. https://401kspecialistmag.com/sustainable-scam-is-esg-about-responsibility-or-higher-fees/

Swedroe, Larry. (2016, July 25). ETF.com. Swedroe: Costs Of Socially Responsible Investing. https://www.etf.com/sections/index-investor-corner/swedroe-costs-socially-responsible-investing

Wursthorn, Michael, (2021). Wall Street Journal. Tidal Wave of ESG Funds Brings Profit to Wall Street https://www.wsj.com/articles/tidal-wave-of-esg-funds-brings-profit-to-wall-street-11615887004

Yardeni, Dr. Edward, Abbott, Joe, Quintana, Mali. (9 December, 2022). Yardeni Research. Corporate Finance Briefing: S&P 500 Buybacks & Dividends. Figure 3: Buybacks & Dividends. https://www.yardeni.com/pub/buybackdiv.pdf

Podcast transcript0:00:01.0 : ESG, get the beeeeep out of here. ESG sucks. In this podcast, I am joined by Erik Balchunas, who is a senior ETF analyst at Bloomberg and the author of The Boggle Effect. Dr. Ellen Quigley is a special advisor to the Chief Financial Officer of Responsible Investment at University of Cambridge. She is also a senior research associate in climate risk and sustainable finance at the Center for the Study of Existential Risk at the University of Cambridge. We’re going to talk about why ESG is nothing more than a way for Wall Street to earn higher fees off of unsuspecting people who mean well. Don’t get taken, folks. Listen to this show. Welcome, Erik and Ellen. Thanks so much, Sarah. Great to be here. Great to be here. So what we’re going to do is I’ll list out the reasons I think ESG sucks and then after each one you tell me if you agree or disagree. If I’m tripping or whatever. Sound good, folks? All right. So before we get into it, let’s just start with some basic definitions because one of the things, first of all, that really annoys me about ESG is how some people, even people who are supposed to be the credible authorities, misuse the terminology in this field.

0:01:15.9 : So first of all, ESG, what does each letter stand for? Who wants to take it? Environmental, social, and governance. Okay. And so I think people understand the E and the S a lot, but what is the G part actually? It’s an unhelpful tack on. Usually viewed as unrelated to the first two, but it’s meant to address things like board composition and so on and so forth. Okay. I can tell you’re not a big fan of this. This is going to be good. I’m going to get into it. Okay. Another term that people often blend with ESG is SRI. Now this is way back. I remember, it must have been over a decade ago, Amy Domini with Domini Investments was one of the first kind of socially responsible investors. So SRI stands for socially responsible investing. Is it ESG? It’s useless in many of the same ways, but probably with much more sincere intentions behind it. Well, socially responsible investing aims to eliminate the sinners. So, you know, gun stocks, nukes, whatever. So it’s a restrictive form of investing and it is a part of ESG, but people kind of use it interchangeably and it’s not. Okay.

0:02:34.8 : ESG is not all involving restricting from the bad investments. ESG also aims to promote supposedly the goal of ESG is to promote the growth of companies that are supportive of beneficial practices, which is debatable and we’re going to get to that. Impact investing. Okay. So impact investing is, well, in some cases it refers to making private investments or investments in private companies, but it’s the idea of promoting companies that aim to do good in the world or have an impact. Brown versus green stocks. Could we say dirty or fossil instead of brown? Sure. Yes, exactly. This is something that people just throw around. So what’s the distinction there, Ellen? I mean, it’s going to sound a bit artificial, but yeah, so like a pure play fossil fuel company would probably count as a dirty or fossil fuel stock, whereas a pure play wind turbine company would be viewed as green.

0:03:36.1 : Okay. And right there, I think, you know, the idea of, okay, well, first of all, my take on impact is I’m probably the most optimistic there. I don’t know how Ellen feels, but impact is, okay, let me buy wind turbine companies or solar energy companies. And in the ETF side, those ETFs would be like tan, which is like 20 solar stocks. It’s a pretty clean situation or communication. Hey, I want to put my money into some things that where people get up every day and try to like get something done on this thing. That’s just the E by the way, it’s not the S and the G, but that kind of makes sense to me. I’m going to put my money towards this and try to have an impact. So when you talk about those companies, that kind of play also typically fits in a portfolio where you might have like a couple of cheap index funds or your 401k account. You could just tack that on. You know, 7, 8% or even less. And now you are sort of long these stocks or companies that are doing this thing that is good for the environment or what have you.

0:04:48.1 : I’m sure we’re going to get to the ESG and SRI where you exclude companies, but I kind of get impact investing. To me, that makes sense. I think people sometimes confuse that when Tesla was kicked out of the S&P 500 ESG index, people were like, what? It’s a clearly, it’s literally an EV company, but people, again, they confuse what the company does with their ESG scores. Whereas impact, I think is a little clearer. What this company does is part of the impact. And I just seems like it’s the communication there at least is pretty clear. I don’t know if you guys disagree, but impact to me makes the most sense.

0:05:28.2 : I think we do disagree on a couple of things, Eric, which is good because it’ll keep Sarah’s podcast interesting, but I would not consider a renewables ETF an impact investing and would, it’s pretty much useless to select that versus something else because it’s secondary marketing. Okay. But let’s go through that. Like, so if you buy 20 solar stocks, why is that useless?

0:05:52.0 : Because there’s no additionality base, not, not, no, there is such a tiny, tiny amount of additionality that it’s basically, it’s, it’s basically no additionality. So it’s secondary market. It doesn’t affect the company. You’re buying and selling between and among investors. The money doesn’t go back to the company. I’ve reviewed all of the studies on this. Basically, it’s hard to find any real impact from that.

0:06:14.3 : What about if you just think that’s a, an industry that will, will grow?

0:06:21.8 : Sure. But then you’re not having an impact.

0:06:23.8 : Okay. All right. All right. Fair enough. Maybe I’m confusing the fact that impact has to be private. Does it have to be in the private markets?

0:06:33.3 : Sarah, feel free to, I know I have to say the whole thing about it. I think it has to be in debt or, or private markets because that it has to be a primary market transaction.

0:06:45.6 : Yeah. Right. Okay. I mean, let’s face it though. I mean, enough public market interest could push the envelope on some of these things, but if, if my little account buys tan, I, yeah, it’s not going to really move the envelope. Even at high. Yeah. No, like honestly, it’s, it’s secondary market is not where we want to have impact even at fairly high levels of involvement on the part of very large investors. So, okay.

0:07:12.0 : Let’s just say we, okay. I still get impact investing if it’s private, right? I’m not saying I don’t, I think what I will then switch my terminology, I’ll call tan a thematic ETF that happens to be in the sort of environmental realm. And I, I like those. I mean, I, I, again, I’m kind of with you. How much good does it do? How much good does it do? But for me, I’m looking at portfolios all day and I, to me, there is a, you could see the practical purpose. I mean, let’s just say, is there any purpose at all to owning a solar company?

0:07:48.7 : I mean, yes, but I mean, yeah, we could, this is a whole conversation. It’s just that like owning a listed solar company, owning the shares of it doesn’t help or hurt that solar company on average.

0:08:02.8 : Right. And I think this is where we get into the ESG and which is a bigger that, you know, ESG wants to sort of be your core, right? Wants to be, hey, sell all your index funds and buy this ESG strategy. And then the question is how much does that actually impact these companies? I would assume you’re of the no, because now we’re talking the same deal. It’s all secondary market. It’s all publicly traded companies. I’m going to value this one and take this one out, tweak this, do that. And I’ve got my ESG. I’m going to sleep at night. And that’s, that’s largely BS.

0:08:39.6 : Yeah. It’s rearranging deck chairs on the Titanic.

0:08:43.4 : Yeah. This is what the BlackRock X sustainability person came out and basically said, not only is it not doing anything, it’s actually bad because it’s giving people a false sense of I’m doing something.

0:08:55.8 : I really agree with Tariq on this. He’s technically right. So what I have about five reasons that ESG sucks. And one of the reasons is, and folks tell me if you agree or not with this, is that it’s active investing done badly. And the reason is that by excluding stocks, you’ll make it more likely that you’ll underperform. According to Larry Swedro, quote, controversial investments generally yield positive abnormal or risk adjusted returns using the Carhartt, Carhartt four factor model, which is beta size value and momentum. Screening them out produces suboptimal financial performance. Practically all controversial cluster portfolios significantly outperform the market and do so with statistical significance at the 5% level. And in most cases at the 1% level. Gray Ritchie summer in the 2016 issue of the Journal of Investing, Ritchie examined the risk adjusted returns of a portfolio constructed of firms from SIN or vice related industries using data from the Center for Research in Securities prices covering the period May 1995 to May 2015. He analyzed the performance of a vice portfolio made up of 41 corporations against the market portfolio. The firms in his vice portfolio came out, sorry, came from the alcohol, tobacco and gambling industries listed on the nice NASDAQ or NASDAQ OTC.

0:10:27.5 : He then added firms in the defense industry to complete the portfolio of vice stocks. Ritchie found that the vice fund produced a greater risk adjusted return compared to the results of the Carhartt four factor model over the market portfolio throughout the same period. The results were statistically significant at the 5% confidence level. What do you think?

0:10:50.3 : So I completely agree. Larry Swedro is really smart and he’s really good at factors and the whole like trying to discern where returns come from. I think also just you’d have to use the sniff test. I’m a big sniff test guy. If you have the ability to buy a sort of Vanguard total market index fund at three basis points fee, that’s a frictionless exposure to everything. And we know sometimes sectors have good runs, then they go down, they go up, they go down. Growth is in play, value is in play. We just saw it this year. Many ESG ETFs are underperforming because they tend to have a little bit of a tilt towards tech, which has high ESG scores and a little bit tilt towards growth. Those two are out of favor. The dirty oil stocks are having a great run and that’s been tough on them. So this year I think has reminded people that you’re right, it’s an active strategy. In a book I just wrote, I talk about how active is evolving. And one of the new ways is ESG. I find that’s like, active has a lot of faces and this is a new face of active.

0:11:53.1 : But they try to pull at your heart strings and your morals. And that’s what I find a little dangerous because it’s sort of pitched as you’re going to sleep at night and outperform and do good. And maybe you’ll sleep at night and maybe you’ll sleep at night, but the other two, we don’t know. You might outperform during a couple of years, then you’ll underperform. But over time it’s going to be higher fees. So I would argue if you took a Vanguard three basis point, classic index fund and you compared it versus an ESG fund that maybe costs, let’s say, we’ll be generous, 20 basis points only. Over 10, 20 years, I’d be very confident that the Vanguard one wins. The question some people are now asking is, well, is the underperformance worth it? And that’s where I don’t even think it’s worth it. So I’m not really sure. In my opinion, a lot of this is A, active and B, preying on slacktivism, which is the idea that I want to do good, but I don’t really want to make a lot of effort. I just want to feel like I’m doing something good and then I can go on my way and not, I don’t actually really care to look into whether it is actually doing good.

0:13:03.9 : I just want the feeling, thank you, and maybe a little superiority and I’m good. And I’ll pay an extra 10 basis points for that. So I worry there’s a lot of that. So I always tell the ESG people, I’m not totally anti ESG. I’m just anti nasty surprise. And I feel like over 10, 20 years, it’s possible somebody wakes up and goes, wow, I didn’t think I would underperform in this thing. Now I’m sad. I sold out my whole core index fund and replaced it with this ESG thing. I shouldn’t have done that.

0:13:32.8 : So some people say that ESG has saved active management because you can charge fees for it. I mean, you’d be very lucky to get away with just a 10 basis point increase to your fee levels from ESG. It’s often a lot more expensive than that. Honestly, the studies are all over the place about SynStock’s ESG outperformance. I think there are methodological issues with many of the studies and there are many different things going on. So one thing is if you look at fossil fuels, for example, they’re a very volatile sector. And so I’ve reviewed 118 years worth of data in all the studies that I looked at. And basically, it doesn’t matter whether you own fossil fuels or not, but it really matters when you divest or buy because the timing is hugely significant. I think actually somewhat the same thing is true. I think tobacco and alcohol, if you look at more recent years, the younger generation is not getting into those habits at the same level as others have. And so the most recent studies on tobacco, for example, don’t find the same outperformance. But again, all of that is beside the point. It doesn’t matter.

0:14:50.7 : It’s all, again, rearranging deck chairs on the Titanic because if you look at climate change, for example, the effect that climate change will have on your whole portfolio definitely dwarfs whatever fee levels or stock picking variation you’ll have from the index. So that’s why we have to actually try to address climate change. That would have a much better effect on your performance in the medium and long term than anything else. We can get into what I would suggest to help make that happen through investments, but basically it’s not through stock picking and you will just pay more as Eric was saying. All right. So the second point that we’ve kind of tossed around, and I want to just go back over this so that it’s really ingrained, all right. But it’s the idea of secondary market trading as having impact or being hurtful to the company. All right. And this is what I feel isn’t made clear when you see ESG marketed to investors and even to financial advisors. And I feel like a lot of financial advisors don’t even understand why not. Okay. So the idea that market participants can voluntarily change overarching global problems by the force of their market behavior is a flawed premise for the reasons that we’re going to describe.

0:16:12.5 : Okay. Secondary market trading doesn’t really impact the company. It’s an exchange of shares. The bad companies who are the offenders already have enough capital. All right. And they aren’t issuing shares. In the case of the S&P, a lot of times they aren’t issuing shares to fund their operations. In fact, they’re probably net buyers of shares. Okay. So according to Yardini Research, there was $200 billion of buybacks in quarter two, 2002 for S&P stocks. Okay. And Apple is sitting on over $200 billion in cash. Okay. There’s just a massive cash pile held by these companies. And if they need to boost their price back up, they can buy back stock. Basically, the stock market, you can think of it as like when someone lists, when a company lists on the stock market in the first place, it gets money. That helps because that’s a primary market transaction. But after that point, it’s just a bunch of swirling or it’s trading slash arguably gambling. And there’s no kind of… The publicly listed companies are actually usually returning money to shareholders. Yeah. Well, dividends or…

0:17:23.2 : Well, I would say that returning of the money is why you invest. I mean, that is… Well, yeah. That’s… I mean, forget ESG. That’s like why you want to be in stocks versus a commodity. There is that cash flow that you get a part of. So I agree. That’s a good thing for most people though. But in the case of ESG, that doesn’t matter.

0:17:46.6 : Yeah. But those same companies and many private companies and nationally owned oil companies and so on and so forth will be raising new money on the bond market. And that’s where 90% approximately of new capital flowing into fossil fuels comes from, for example. So if you’re going to have exclusions, the bond side is much more likely to have an effect. And indeed, there is evidence to suggest that that is the case. It has already affected cost of capital on the debt side. And if you have less demand on the debt side, you can raise less money and less of a good price. Whereas it’s just not like that with public equity because that’s not new money when you invest.

0:18:31.3 : Yeah. I like to sometimes imagine the stock market is a circle. It’s just a circle of people trading back and forth. And I think sometimes people need a visual, but that’s all it is. It’s just people going back and forth trading, which is why investment returns, the cash flow and the earnings growth is great. You get that over time. But the trading creates these little bubbles and it comes down. And I think that’s where sometimes in the past five years, the ESG strategy has done well simply because people value tech and growth wasn’t necessarily because of ESG. But again, that’s just speculative return that is very volatile and goes up and down. But it is gambling, although within the stock market, those people trading back and forth in a circle, there are plenty of people who are just in the market and not trading. Those would be investors. But the people who determine the prices are the people speculating.

0:19:32.0 : Totally agree. But if the shares get dumped, if all the ESG investors said, okay, let’s dump all shares of Exxon and the price plummeted, that would have the effect, though, of ticking off the executives who own that company’s stock on a personal level. So even there, it might not, because actually a majority of, especially in the US, the majority of the remuneration packages for executives are actually negotiated on the basis of the number of shares. So if the share price is actually artificially depressed, arguably, the executives are actually better off because they have under priced shares they can sell for. Anyway, so it’s actually, even there, I wouldn’t necessarily argue that you’re going to have a direct impact. And actually, yeah. Well, I would say, like, if there’s a lot of factor investors like Larry Swedroe and a bunch of them who really don’t care about any of this, and they’d love to buy up these cheap shares of an energy company based on their cash flow and their fundamentals being pretty sound.

0:20:43.4 : So you get to get a good amount of cash flow for a cheap price. Somebody is going to buy that. So it’ll probably just come right back up to where there’s an equilibrium. I agree. And even if like the, there’ve been some models that look at just really, really high levels of public equity divestment, and it takes an awful lot of that. I would say probably an unrealistic amount of that to really have an effect on a company anyway. But I agree, people come back in because it’s, and also Exxon’s huge. They’re so huge. There is one thing I heard. I was going to say, I was on a panel with the guy who runs the S&P 500 ESG index. And we were talking about this idea when, you know, they kicked Tesla off. It was a whole controversy. Even, you know, Elon weighed in, called ESG a scam. He was all, and then the companies that were in the index were like Pepsi and Exxon and everybody’s confused and it’s a whole mess. Anyway, on the panel, I was like, what good does this really even do? He did, here’s one case he did make there.

0:21:41.8 : He goes, we’re S&P. These companies want to be in our index and privately they will, they will, we do indirectly or indirectly put pressure on them to fix some of these metrics, simply because they don’t want the embarrassment of getting kicked out of such a, first of all, the ESG index. And that potentially, if they were to get sold off more, they get kicked out of the regular S&P. So there is some like, I want to be in the S&P membership club thing. I don’t know if you, I’m curious to get Ellen’s take on that.

0:22:15.8 : There are a couple of studies that support you actually. I think it does have more to do with kind of social discourse and the index effect. But yeah, that’s, there is some, some evidence to suggest that companies that are threatened with exclusion from an index are more likely to comply with the S&P. Exclusion from an index are more likely to comply with the standard of the index, comma, however, if you look at the data providers in the space, I mean, there’ve been lots of studies about how they disagree. They all measure different things. It’s a mess. But also like most of the stuff that they’re asking these companies to do well at have to do with disclosure only, or other kind of what I call means-based indicators. And if you look at the evidence around disclosure, it’s, there are more studies finding a negative correlation between improved environmental disclosure and actual environmental performance. Then there are studies suggesting that there’s a positive correlation, meaning much of the time it doesn’t actually help the company become any better when they disclose more. But often it’s the companies that want to distract from their really bad emissions by disclosing that are the ones doing the better disclosure.

0:23:25.6 : And again, none of this changes the actual emissions. The planet doesn’t care whether your disclosure is good.

0:23:31.1 : Right. And this is the greenwashing that happens, right? With that. And then there was an article on Bloomberg, which got into this a little bit, which I’m just curious to get your reaction is like, they were saying that even the companies that are the polluters that you want to see do better, a lot of them are just buying credits or somehow they’re not actually not, they’re not actually changing their behavior. They’re just financing their way around it. But the, that does have a downstream impact because it, those credits or that money goes to a solar company or somebody who is doing that kind of a thing. So there is a downstream positive impact, but the company got its ESG score up without really doing anything.

0:24:20.5 : So it’s actually even worse than what you say because offsets, for example, there’s a study that suggests that about 95% of offsets do not sequester the carbon promised. And in general, I’m very skeptical of that field. So having companies meet these commitments through offsetting or credits, I don’t think that’s credible. Also, I mean, as, you know, Oliver Hart and Luigi Vingales have written, there’s a comparative advantage for companies in preventing externalities from costing society in the first place. Like to try to clean this stuff up afterwards doesn’t make any sense if you can prevent it from happening in the first place. The prevention, you know, pound of cure, all that, all of the sayings on this ring true. It’s going to be just a point for the audience. What is an offset? So it’s basically like a religious indulgence, effectively. So if you emit a ton of carbon, you can pay somebody else to hypothetically sequester or reduce the equivalent in their own emissions. And the problem is, is that, I mean, a lot of these are, yeah, anyway, this could be a whole other episode, Sarah, actually. But basically, it’s a way of not having to actually decrease your own emissions, but instead getting someone else to do it, supposedly, which is kind of the problem.

0:25:44.7 : There are, you know, carbon credit schemes that are, like there’s one in the EU and so on and so forth. Like it depends on who does it and what it is. But in general, the whole idea of offsets in particular, quite problematic. And yeah, probably better to actually be emissions at source. But to me, this adds only another layer of confusion and ineffectiveness. Because even if you got the right ESG ETF that you just can live with and sleep at night and all that jazz, some of the companies that make it in probably do this number. So the greenwashing underneath the fund is a whole nother layer that most regular people cannot go that deep into due diligence and figure this out. I mean, I guess if you follow like certain like green publications, maybe they’re going to talk about this a little bit. But again, the vast majority of people that ESG is being pitched to are regular people and advisors who are just have that feeling like I want to be that person who has the green portfolio and I can, you know, not be investing in the bad people and the bad things.

0:26:57.6 : And it’s pitched so simply. But again, you unpack this and it’s layer upon layer of like inconsistencies, confusion, lack of transparency. Also, the ESG industry also does itself no favor because we talked about the E, the S and the G. And the things that make up the E and the S and the G, there’s maybe, I don’t know, 15 metrics under each give or take. They never get explained to normal people. The ESG people don’t really do a good job. And so a regular person has an image of a company like Tesla and thinks this has to be an ESG company. It’s out there making cars. But the scores are much more detailed and wide ranging than just what the company does. Right. So right. There’s so many levels. That’s what I wanted to get into next. That was my third reason. This is this is another thing is that ESG ratings are just a form of signaling. And a lot of times they’re quite insubstantial. So it’s unclear who the good and the bad stocks are because ESG scores are just signaling. There’s no universal meaning that has anything true behind it. OK, the ratings are assigned by different rating companies.

0:28:14.5 : It’s not regulated. And they’re all different from one to the next and how they evaluate these companies. It’s not like in the corporate bond market where we have Fitch and Moody’s and S&P. Right. There’s this huge disparity between how one rating agency is doing it and the next one. So, I mean, none of it matters is the problem. Right. Like, we’re spending a lot of time on these disagreeing ratings. Yes, they disagree. Yes, they measure irrelevant things, in my view, for the most part. Again, it tends to be like indicators of indicators, reporting and disclosure instead of actual impact. But none of that matters because the ratings are typically applied only to public equity holdings anyway. So it’s all like it’s rearranging of deck chairs on the deck of another deck of another deck. Like it’s just it’s uselessness piled on top of more uselessness. Oh, man, I honestly I thought I was the most like the biggest skeptic. I’ve met my hero. I think this takes the whole conversation and just makes it almost an exercise in futility. This public compass, you know, if you’re on the secondary market, you might as well just not bother.

0:29:30.8 : I mean, there are other things to do.

0:29:33.3 : There are other things you can do. I do have some hope. But yeah, you’re right. I am usually the most skeptical person in the room.

0:29:39.7 : I mean, it’s funny where you talked about impact and going to primary market. I’d love to get your take on this one thing that this against I’m more sniff test. I’m not an ESG person, but I have to cover it because I cover ETF. So I don’t know four to 3% of my world is ESG, right? But when I go to ESG, it’s be taken up a little more of my time because it’s such a debatable issue. And there’s so much hype and I have to push back against it. So I’ve heard about it a lot. But one thing I’ve come to some conclusion of is naturally is what you did, which is I don’t know how much you can actually do good with your portfolio. It seems like the way to do this is through the government like voting and regulation. And as a consumer, it seems like you have way more power as a voter and a consumer than you do as an investor. But the investing seems to be a place where it can be expedited. You could get more fees there. So they’ve really grabbed onto this lane as a way to change.

0:30:40.2 : But it just seems like the weakest lane of the other choices. What do you think of that?

0:30:45.8 : I think that it can ease ahead of consumer behavior pretty easily actually for reasons we can get into if that’s helpful, but not the way it’s currently being done at all. So there are other things that can be done as an investor because there are… So actually, I mean, I agree with you about voting and regulation, huge, comma, however. All of that whole process… So I’m Canadian, right? And we’ve got intense fossil fuel capture of policymaking in my country. And that is actually something that is within the control of large institutional investors because it’s these companies that are doing that lobbying directly or through trade associations. So that’s one aspect. That’s something that could very concretely be done to help improve the political process and the outcomes associated with it. So that’s huge. But also, I’m more of a subscriber to the view of universal owners. So basically everybody now these days, other than the speculators we were talking about before, own a more or less representative slice of the whole economy. And therefore, you have to think about externalities. You have to think about things that some companies are doing in your portfolio that are hurting everything else.

0:32:06.7 : And part of the problem is that many of the companies that have the greatest externalities, the greatest that impose the greatest costs on everything else in your portfolio, are domiciled in a country that may not want to regulate that because it’s pretty profitable. But if you own, if you’ve got investors from around the world who can force behavior change, that’s a way of kind of leveling the playing field across jurisdictions and therefore supporting the kind of regulation that we would want to see too. Because if you can get enough behavior change from the company in the reluctant country, then that company might actually want its smaller competitors to actually be regulated to meet the same standard that they’ve been forced to achieve through investor pressure. So that’s part of the theory. It’s all an assemblage though. You do need the, I mean, there’s probably nothing more important than government regulation and your influence over that by voting. And then the other thing about consumption, I’ve had ESG people before say that’s just not really that big of a deal.

0:33:09.7 : But I think to normal people who look at ESG and then they, or they see somebody talking about climate change, you may even believe in climate change, but you’re just unable to change anything about your lifestyle that’s inconvenient. And even like very wealthy climate change advocates just fly on private jets and there doesn’t seem to be any inconvenient choices being made. And it seems like inconvenient choices are absolutely necessary and would get more followers than just talking. But maybe I’m wrong. Maybe the talking and there’s just one or two switches that can be flipped all of a sudden. But I’ve always thought that if you want to make Exxon ESG just demand green energy, like the demand will, supply will react to demand. And sometimes I feel like ESG is trying to force supply to change demand, but demand is clearly, if you can’t change demand, what’s the point of messing with supply?

0:34:11.5 : So I think that’s a very logical train of thought, but there’s a reason that the fossil fuel companies actually funded the whole carbon footprinting exercise. And it’s because they know that actually without system change, individual behavior change is really, really hard. So there’s actually no credible way to demand green energy in your home, because usually that’s difficult to do, maybe even impossible, and especially to get kind of additional demand from consumers. And the fossil fuel companies understood that very well, right? Like if I want to take only public transport, I need there to be good public transport. Like it doesn’t actually, the connection between even quite a few people deciding to take more public transport, that’s not going to make the difference. What does make the difference there is governments actually supporting investment in public transport. I do think if you’re Al Gore and you’re flying around in your private jet, yeah, you should make a different choice and it is going to probably be more inconvenient because that’s an outsize effect on overall emissions. And again, the rich are actually very disproportionately contributing to emissions anyway. But for the average person, what’s going to be much more effective is to work on voting and then to pressure pension funds and banks with whom you have a direct relationship, because those are the big blocks of capital that can actually push companies.

0:35:35.5 : But how much does the whole economy have to change? Because aren’t the rich really the ones rich now, rich because of globalization and like everybody moving all over all the time and stuff being shipped and everything just flying all over the place. Whereas, like remember during the pandemic where people like just stayed home and walked down the street and everything just came to a standstill. And I had this feeling like this might be what has to happen. Like globalization will have to resort to localization because you can’t just send everything everywhere all the time, right? Or is the proposal to make everything you’re sending and moving and flying and this all somehow green and not having an impact on the atmosphere?

0:36:20.1 : I think that’s a really, really interesting question. I think one of the disturbing things about what we saw in the pandemic is that even with, I mean, it’s like the ultimate experiment in consumer choice, except for that people didn’t choose it, but no one knew basically for a while. And it only cut down emissions and demand for oil by a relatively modest amount, because it’s the system, right? Moving things around still accounts for a huge percentage of overall demand for oil. And gas is built into lots of our systems, heating homes and electricity. These things aren’t things that individuals can shift, even with the most extreme example of everybody staying home for quite a long time. So yeah, that just seems like… But the interesting thing actually is that as we move away from fossil fuels, we will de facto be localizing our economies more, because I mean, most oil and gas are exported and therefore imported, whereas with renewables, that’s really not the case. It’s something like 3% of renewables get exported across the border, whereas it’s like two thirds for oil and gas. So yeah, I think it’s an interesting thought exercise, but we will see de facto less movement of at least some goods, just as an automatic response to the penetration of renewables into the system.

0:37:53.3 : Then there’s also the idea of companies engaging in ESG just for the purposes of virtue signaling, so that they can get their ESG scores up. So in a sense, the companies that are the subject of ESG are trying to game the system, and they do. Completely agree. What’s the signal if most of the indicators are, are you reporting this, are you disclosing this? It actually gives a roadmap for anybody who wants to game the system to do so. They’re very happy to produce a report and not do anything else. If you go on Twitter and you just see the CEOs tweeting things like…

0:38:32.8 : The signaling thing you talked about, that’s where the CEO comes out for or against something. Again, that’s probably slacktivism. That’s just someone trying to say, I’m a good person. I’m into this issue. There’s actually ETF that came out here called Yall, the God Bless America ETF, which purposely, it invested in the market, but it takes those companies out if the CEO does anything that’s virtue signaling, which is… That’s how many ETFs there are. There’s an ETF that’s called God Bless America. That’s how many ETFs there are. There’s an ETF that does that.

0:39:03.3 : Yep. There’s starting to be some scrutiny of these types of claims though. That’s the good news. In the UK, HSBC has been pulled up because they’ve been advertising their green stuff, but of course, they’re one of the world’s largest financer of fossil fuels. Similarly, in Canada, RBC, also one of the world’s largest financer of fossil fuels has been pulled up for its green advertising. Because it is misleading, but finally, we’re starting to see that that signaling sometimes have some negative consequences if it doesn’t match reality, which it pretty much always doesn’t.

0:39:39.9 : The G. We’ve talked about the E a lot. The G is about this governance thing. I was exploring this for Warren Buffett, because they really value independent directors on a board, which makes sense. You want an independent… But he says, I have been on 20 public company corporate boards, and I’ve seen a lot of them operate, and the independent directors in many cases are the least independent. If the income you receive as a corporate director, which typically may be around 250,000 a year, that’s an important part of your income, and you hope to get on some other boards, and then the CEO calls and says, how so and so, and the current CEO, your CEO says, oh, he’s fine, he never raises any problems, then you’re likely to get on another board for another 250K. How in the world is that independent? Because Berkshire sucks in the G, and they are not in any ESG ETFs. People find that shocking too. They’re like, Warren Buffett, he’s a big philanthropist. He also sticks to the E, by the way. The E too. I get it. The E as well. But the G, he brings up again another point that makes you think.

0:40:50.7 : Look, this actually links to some of the positive stuff that comes out of the research in this area.

0:40:56.9 : So I’m not saying this is a silver bullet at all, but there is some evidence to suggest that voting against the re-election of directors, like retaining the shares of a company you disagree with, voting against the re-election of directors, it’s actually pretty embarrassing for somebody who’s got that dynamic going on behind the scenes. These are high status individuals, even if they get 90% of the vote, that’s a slap in the face often. So combining that with denying primary market capital to the same company, you can have that kind of personal embarrassment element plus potential effect on cost of capital, and together those could plausibly actually have an influence on a company. And again, the other thing that you kind of end up concluding in this space is that we need a diversity of different tactics, and it’s the kind of assemblage of them that’s most likely to produce a result. And that’s what you see if you look at examples like apartheid South Africa, and so on and so forth. It was like layering on of a bunch of tactics. And I think we have to use the strongest tactics that we’ve got, and those appear to be voting against the re-election of directors and denying primary market capital like bond money for a new bond issue.

0:42:06.6 : So you’re bringing up voting, and this is where there’s two dimensions to this argument. There’s an ESG fund that picks stocks based on these metrics, right? That’s a whole thing. That’s investing ESG. Then there’s, that’s the what? That’s the Titanic.

0:42:23.1 : Yeah, that’s the Titanic. That’s the Titanic.

0:42:25.7 : What about this, though? What about you’ve got Vanguard BlackRock, State Street, own about 20% of every American company, the way they vote their shares and how much impact does that actually have? Because there’s a company called Engine Number One, which says, here’s how we’re going to do it. We’re going to just serve you beta. So we’ll hold all the stocks, but we’re going to be activists and push for these things and try to get in the ear of these bigger investors. And they had some success with Exxon. And then that’s how they’re going to do it. And that’s more the proxy voting method. Would you find that to be less Titanic-ish? Yep. Yep. With a couple of caveats. So, I mean, one is like, I do, I would personally, if I had any money, I would probably personally invest in index funds, but I would be very careful about which company I went with. And I definitely wouldn’t go with any of the top three that you just mentioned because their voting records are poor and they are primary market purchasers of all sorts of things we wouldn’t want. But I think it’s much more credible to just track the market and then be much more aggressive.

0:43:31.8 : Shareholder resolutions, though, definitely don’t vote against them because I actually feel like that could hold back progress. But shareholder resolutions, I think, are more of like a longer-term social discourse thing, more so than directly immediately effective because most of them are disclosure-based only, as we’ve been discussing. Most still don’t pass. And then even if they pass, the implementation rate is actually quite poor. And again, if you’re just implementing write a report, that’s not very useful anyway. So I’m a little bit more skeptical of shareholder resolutions unless there’s a lot going on behind them, which I have seen good examples of that, but very few. Because it’s funny, just one thing on this. It’s crazy, BlackRock to me is probably the best example. Vanguard doesn’t say much, so nobody bothers them that much, even though they’re a bigger owner of most stocks. But BlackRock, like Larry Fink came out and said, oh, we’re serious about climate change. But then it kind of threw him into the middle of this. And what’s crazy, BlackRock will have protests outside of their office with climate activists on Monday. And then on Tuesday, it’s coal miners who are pissed off at them.

0:44:46.8 : Or it’s like Florida and Louisiana divesting their pension funds from anything BlackRock-related. And so they get hit from the left and the right. And they put themselves in that position by sort of going into this situation. But I do have some sympathy for how difficult it must be to be one of these companies. So what they started to do, and I think this is probably smart, maybe Ellen disagrees, at least from, if I was them, I’d probably do this. They’re going to turn over or give you an option as an investor in their index funds to either, I believe you could use a third party. And you can pick from, I guess, a couple third parties who might be consistent with your belief system. Because there’s no way they can vote on all these resolutions. They’re too complicated and time consuming. Nobody would do this. No, but no one votes proxies. Right. So Schwab is going to poll the investors and figure out where their head is on these issues and then vote accordingly. But at least giving the end investor a choice of like, OK, BlackRock, I trust you vote how you want or I’ll use this third party.

0:45:54.2 : I don’t know. They’re taking some initial early steps in that direction. I get why they do it. This would probably take a little heat off of them because they could say, well, I’m not doing the voting. It’s my 30 million investors. But then you’ve got all these different views who might actually just end up in the same spot BlackRock is, which is we’re going to be middle of the road and not try to piss off anybody.

0:46:16.4 : There’s a lot in there. So one thing is coal miners should not be mad at BlackRock because they’ve only excluded 18 coal companies out of hundreds and only from their active business when they’re much more a passive house. They’re not hurting coal miners. I find it quite funny that they’ve gotten this anti-ESG blowback for basically doing nothing. And basically the reason that they get picked on too is because they do have a kind of hypocritical approach to this. Sorry to put it that way. Talking a big game but not matching it with what they actually do. I am very skeptical of the voting choice move that they’ve made. I agree with you that it probably makes sense for them to do it, but I much prefer the polling of beneficiaries approach. The way that if you look at behavioral psychology, behavioral finance, people go with defaults to such a degree that you’re just not going to get a lot of opt-in preferences. And therefore what BlackRock does as a house will still account for the vast majority of votes, but there will be less pressure on them to actually vote appropriately with that market power.

0:47:37.9 : So I much prefer the option of polling beneficiaries and voting accordingly. Also, I think it’s more democratic generally.

0:47:46.2 : Yeah, I agree with you. I think polling is where I land. That’s the Schwab method. Vanguard and BlackRock, it’s not quite the same, but I think they’re experimenting. I think one of these will take root. Maybe the polling method will. But I think this is the direction it’s going. Right or wrong? I think the one thing that I think most people… I cover passive investing, and there’s all these passive attacks like it’s ruining fundamental, it’s doing this and that. And most of them are just like sour grapes from active managers. But the one that I thought had the biggest resonance is this, which most people can just understand is like the concentration of power with BlackRock and Vanguard in particular, they each own 15%. And at the rate the flows are going, they’re going to own 20, 30% of most of America’s companies in the next decade, because they take in about two thirds of all the new cash invested in America. And so they’re going to be hugely influenced unless they get regulated and the government just says, you cannot get any bigger, which is possible. But anyway, that point is, so there’s a corporate governance group that sits in New York that works for BlackRock.

0:48:58.1 : Let’s just say there’s 10 people. I don’t know exactly how many others. There’s 10 people. They don’t own that much of any company. It’s 30 million people who own 8% of Exxon. But those 10 people are able to make that vote. I get why that seems problematic. It just seems undemocratic to not to have those people which really don’t own those shares. It’s their investors not have them involved in the process at all. And I think that was one of the biggest legit worries about the rise of passive was the concentration of power in those two firms. But this is, I think one step to deal with that. I think there’s a bill in Congress about that. Senator Dan Sullivan of Alaska proposed that portfolio managers or portfolio management companies are not allowed, should not be allowed to vote proxies of index funds.

0:49:52.9 : Yeah, this is another thing that was brought up by the guy from Janice for the op-ed in the Wall Street Journal saying just they shouldn’t be allowed to vote. Part of me understands this. But I talked to my ESG friends and they think that passive at least take summit ESG into account. Whereas active just wants profits. They’re a little more cutthroat. Don’t care. And they may actually encourage pollution because they want more profits and they don’t want to those extra costs. I think the combo is healthy. Passive has a little more, much more long term viewpoint. They’re never going to sell the stock. They can. Active can sell tomorrow. So I think maybe both actually, you might get the best of both worlds. So I’m of that camp. But I can understand why they would put this bill in. But that you know, if you’re ESG, I think you would not like this bill. Am I wrong, Ellen? We’re just it’s only active managers.

0:50:49.6 : Well, I actually I think it’s really worth distinguishing between fund managers and asset owners. Right. Pension funds, endowments, etc. I this is controversial, but like I would much rather that pension funds vote than fund managers. Because fund managers are trying to get more business all the time. So they don’t want to piss off the sorry, I don’t know if you have language restrictions. OK, great. They don’t want to piss off the pension fund of a company they’re trying to get the business of. Right. So like Exxon’s got a pension fund associated with it. Right. All of its employees will pay into that that pension fund. BlackRock wants that business. So there you know, there’s a limit to how much they’re going to want to be bold, even when they’re really extreme externalities. That these companies are causing. Whereas a pension fund is going, how am I going to pay out my liabilities in 30 years with catastrophic climate change, depressing the value of my entire portfolio when I’ve got like fixed liabilities to pay back in some cases. For them, they’ve got much more of a long term view, first of all, but also the right incentives to actually protect the basis on which they are able to pay back the liabilities that they’re contractually obligated to pay out.

0:52:10.9 : So they’re the ones who are going to try to reduce those externalities in the first place and protect the whole portfolio because you can’t stock pick your way out of these risks anyway. There’s no point in doing that. You have to actually try to change company behavior to internalize externalities. All right. Last points about why ESG is so important. Why ESG sucks on my list here, ESG comes with higher fees. Exchange traded funds that explicitly focus on socially responsible investments have, according to one study, 43% higher fees than widely popular standard ETFs.

0:52:47.4 : Unquote. Yeah, this is this is where the new active, you know, or active management trying to just because the book I recently wrote is called the Bogle Effect about just the epic bomb that Bogle and Vanguard dropped on asset management. It’s changed everything. More and more people going passive that’s pushed active to get creative. The T. Rowe Price Blend Fund thing is just sort of dying. So what do you do? Right. So one of the new ways is ESG. We’re going to pick stocks based on these other metrics. They charge a little more. I will say some of them are pretty cheap. Like, in fact, ESG ETFs didn’t start getting assets until Vanguard came into the space and came out with a sub 20 basis point fund. 20 basis points is like the international demarcation low cost line. Anytime you go below 20, you tend to get bites from advisors. They love below 20. Anything in the teams or single digits, they’ll generally buy just because it’s cheap. Once that happens, BlackRock came in with ESG and Deutsche Bank and they all there’s now, I don’t know, a dozen of them under 20 basis points. And the biggest one is ESG.

0:53:50.3 : You most of the assets in that one come from BlackRock’s own model. So I can’t say there’s a lot of organic interest. BlackRock put it in its own models, which are subscribed to by advisors. It’s probably got 100 billion dollars of subscribership in that model that has 20 billion. It’s 15 basis points. But here’s the thing that is the problem. The the the more the cheap ones, they’re 1512 basis points. They generally hold the S&P 500 minus a couple tweaks. And the reason for that is if you are an advisor and you practically and you’re going to put a big chunk of this in your core, it cannot have much tracking error. You cannot have to explain to the client why it underperformed the S&P. So what the advisors actually like is the ESG label, but with the S&P and they’ll actually pay up a little for that. The ones that do maybe more true ESG on the Titanic, those are going to have more tracking error. They tend to cost a little more, but they’re endorsed more by the purists and the people who really are into this stuff who would think ESG is just a complete waste.

0:54:55.9 : Why? It does nothing except make you feel like you’ve done something. But that’s the biggest ESG fund in America is ESG. But to its credit, it is 15 basis points. That said, you can get beta for three. So it’s five times more than what you can get in beta. But this is where the construction of a portfolio comes into play and why I tend to be somewhat more bullish on thematic ESG like solar, because then you don’t have to dislodge your wonderful cheap beta exposure. You keep giving the money to Vanguard or BlackRock or in Ellen’s case, somebody she likes. And then you can add on a solar ETF into what I call the hot sauce lane. So most portfolios are 85% cheap beta 6040. And then people in that 15%, they want to go a little crazy. They want to do things that are speculative, fun, narrative based to cure their FOMO. And that’s where I find a home for things like solar, wind, clean energy ETFs, which are much more volatile, and they’ll charge a little more, but those are more thematic ESG. So there’s a couple layers to what you just said, but the cheaper the ESG ETFs are, the more likely they’re just full of beta and they don’t really do much.

0:56:12.8 : Although to be fair, none of those strategies that you’ve described do much. We’re all talking about life on Titanic. Yeah. Yeah. Yeah.

0:56:23.5 : So this is all with that in mind that we’re just having a conversation on the Titanic about 10 minutes after it hits the iceberg.

0:56:32.8 : Yeah. Yeah. So I mean, let’s just walk through this from the perspective like of an average person who’s got a pension, right? So let’s say that they decide, yeah, I care about climate change or some of these other issues. I’m going to invest in an ESG fund. Like, first of all, it’s almost certainly going to be one of the ones that you just talked about, where it’s like basically just the index with a couple of tweaks anyway, but they’re going to pay more for it. And then as Tarek Fancy says, it’s a dangerous placebo because then you’re going to kind of go, all right, done. Like my money is invested for good and I can go home and sleep well at night. Meanwhile, your pension, which is for most people, your pension and your house are really, that’s most of your assets, right? And it would be better for you as a pension beneficiary to have a pension fund that underperformed a healthy market than for it to outperform an unhealthy one. And guess what? Climate change is going to have a really serious effect on overall returns over the next 30 years. Hold on a second.

0:57:42.8 : Hold on.

0:57:43.3 : Yeah. Go ahead. I think you’re going to say the same thing as I am.

0:57:46.7 : Because you’ve said this twice and I want to make sure I’m not thinking of reasons for what you said being true. Can you explain that? Why is an unhealthy market bad for the stock market? So really good question. I’m glad we’re really properly digging into this. So climate change, of course, has like a bunch of direct effects that we can probably think about. So like most of the world’s real estate is uncomfortably close to the oceans and so on and so forth. Not most, but most large urban areas are near to a body of water. At least some of that and especially some really expensive stuff is very vulnerable to sea level rise. You can think about the fires, the floods, the extreme weather events, all of that stuff. So that’s stuff I think we all imagine and that’s totally legit. But then you think about second order effects, right? So like Florida’s insurance market is collapsing because of all of that. But also you end up with multiple breadbasket failures and so on and so forth because of drought that drives up food prices. And like that contributes directly to conflict and forced migration, which then is going to cause all sorts of issues like geopolitically.

0:59:11.9 : So if you really map out all of the effects of climate change on a portfolio, like you really do conclude it’s better to prevent this. There’s pretty much nothing that ends up being unaffected. And there are even unexpected connections. Like for example, sometimes hydro plants are having trouble operating right now because of droughts associated with climate change. So you end up with like these massive power bases that can’t work anymore. Volcanoes are more frequent and more severe because of climate change. I mean, all these things, it’s a system, right? And climate change gets everything out of whack. So if you’re in a world in which you have a really good pension fund manager that manages to outperform, which that’s hard anyway to outperform the market, but let’s say they do. And you’re dealing with hundreds of millions of forced migrants due to climate change. Like how are you going to get your money back for your retirement in that kind of situation where it’s this catastrophic outcome? It’s just not going to happen. I know what you mean by that. You’re saying, yeah, I totally get that. That’s a bigger, that’s thinking big, right? Thinking beyond your portfolio.

1:00:33.4 : I get it. My question was more on the pensions. Like in the US, it’s not a lot of that. Maybe in Canada, maybe there’s more, but a lot of people would invest through their defined contribution plan, which makes you pick one of these funds, or you work with an advisor who has access to most of the public funds, mutual funds and ETFs. If you add up those numbers, they get way, they eclipse the defined benefit market in the US by a lot. Yeah.

1:01:05.6 : I mean, defined benefit is declining everywhere pretty much anyway. But I think the main point that applies to all of these types of funds is that most of your returns come from beta. Most of your, I can’t say this enough actually. Most of your returns come from overall market returns. Whether you under or over perform, it tends to be pretty marginal. So if the overall economy is messed up because we allow runaway climate change to take hold, that’s a way bigger factor than the ability of your fund managers to outperform or not.

1:01:39.6 : Well, no, but my question was in your example, you said, if you have a pensioner and you want your pension fund manager to XYZ, in the case of somebody who has defined contribution, why don’t you walk through that? Like, okay, so for the regular person sitting with the DC plan and now start from there.

1:01:58.7 : Right. So, I mean, basically it doesn’t matter how you invest. If you are a regular person and let’s say you buy an ETF or you go to your advisor and you open up a 401k in the US, either way, you are mainly exposed to market risk and market performance. That’s the key thing. It doesn’t really matter how you do it. You’re not going to do like 400 times better than the market. Right. So if we have extreme effects on the overall financial system, which is slated to happen unless we address this issue, it doesn’t matter how you invest. It’s whether or not you’ve protected the whole system in the way that you’re investing. And again, that is also going to come down to a lot of government regulatory action as well. It’s not really not going to come from just pension, pension funds. So at your job, are there people real into publicly traded ESG strategies? Like, do you, or does everybody, I’m just curious, I know where I work, there’s a lot of people into this stuff. Like, so I tend to be like a little bit of the bad guy. Is everybody on the same page as you in the university level, or are they more like coming from where I’m coming from, where they just can’t quite accept the Titanic theory, because it’s just too much of an existential, it’s existentially too difficult to accept that.

1:03:29.7 : So I work with the senior administration of the university, but also the bursars of each of the colleges, because they all have their own endowments, there are 31 colleges, so that’s a lot of endowments. The bursars used to work in the city in a lot of cases, and in general, they are hard-nosed, practical people. So actually, like when we talk about, they’ve actually influenced my thinking a lot over the last few years. And I think we have quite a lot of convergence and a lot of skepticism about this space. And that’s why we actually spend our time mainly on things like directly bothering banks and fund managers to change their behavior, using the evidence base to actually get them to do things that matter, as opposed to the things that are rearranging the deck chairs on the Titanic. And there’s a lot of buy-in for that. I’m actually really deeply impressed and grateful because it does feel like there’s this real sense of common purpose there.

1:04:32.3 : Wow. By the way, can I say one thing, Ellen? First of all, do you have a podcast yourself or no? No. No. Okay. A, I think you should start one on these topics. And B, I have the perfect name for you, Comma However.

1:04:53.1 : That’s it. I just-No, but the name of the podcast would be ESG, Comma However. However. Yeah, maybe. Comma However.

1:05:04.1 : I have to say, I’ll give them an idea. Comma However, a real talk ESG podcast. There you go.

1:05:13.4 : Okay. So let’s just kind of summarize it here for the financial advisors who are listening to this. I mean, for me, I mean, I was ready to kick ESG out the door in the first place, which is why I called you both here. But I mean, let’s say that you somehow do want to use your money to make an impact or that you’re investing, you can’t help but invest, but you’re not the government, right? You can only, you vote and you vote your proxies or whatever. I mean, should somebody just take the money that they would have spent on those expensive ESG funds and then go and donate it to a charity that saves the whales or like, what’s the bottom line here, folks? I have a definite answer, but it’s because I’m totally doing exactly this. And it’s always evolving. So I feel like I’m learning new things about what to do. So this could be very well wrong, or I’ll consider it to be wrong in a couple of years. But I think it’s most important to, A, switch banks. So again, if you look at where most fossil fuel financing comes from, it’s really a debt story.

1:06:21.1 : And a fairly small number of global banks are the ones kind of piling that primary market capital into fossil fuel expansion, including through like utilities that are building new power plants and stuff like that. So I would definitely start there. But the other thing is to put pressure on your pension fund and or your fund manager to get them to vote against the reelection of directors and not participate in primary market issues of capital to companies that are misaligned. And I think focusing on those high impact strategies kind of cuts through. And a lot of these actors don’t hear from very many people. Like a pension fund is going to hear from a handful of people per year. So you’d be surprised how effective it can be to few more write in and have really directive evidence based proposals to take forward. People who work in pension funds have usually taken a pay cut to work there. And they work there usually because they have other reasons for wanting to be there. So they’re not going to they’re going to be more receptive, would be my guess, to those sorts of respects, those sorts of concerns, because they probably share them.

1:07:38.7 : But those are great, novel pieces of advice, no doubt. The pension funds, though, sometimes I’ll hear this, where they’ll be like, oh, yeah, ESG ETFs aren’t taken off that much. It’s really more of an institutional story. But again, we’re still on the Titanic here. And pension funds want to have their portfolio look a certain way and they will exclude stock. So why are they doing that if they’re that clued into what you’re talking about? Is that just for show? I’m not necessarily saying that they’re clued in. And I don’t think that’s for nefarious reasons. I think it’s counterintuitive. If you think, you know, I’m investing in a company, you think you’re helping it, right? And if I’m not investing in a company, I’m somehow hurting it, or at least not helping it. And that’s something that I still run into a lot with ESG professionals, right? So it’s, I actually think it’s a matter of getting the word out about what works and what doesn’t. But I do agree with you, I think there is pressure to do some of the stock picky stuff anyway, because the average person isn’t going to know this, even if their pension fund really does get it.

1:08:51.0 : So I’m sympathetic. The university has done a bunch of things that have more to do with social discourse stuff, because it recognizes that, actually, part of the reason is that there’s a recognition that if you stigmatize certain things, they’re more likely to be legislated. That’s how we tend to legislate things in society. So if you have more fame than money, I would personally tell you to do different things. But most pension funds, no one’s ever heard of, so it’s probably best for them to do the most strategic, high impact things that also, by the way, probably have fewer return implications, because you’re not stock picking, paying higher fees, etc. Yeah, no, that’s that I would say of all the people I’ve met, and I’m in the industry, I think that’s where I get a lot of people who want this to succeed. That they like we’re all on the type panic, I guess, in a way, because I’m in the funds industry, it’s all after secondary market. There’s private equity, of course, that I, you know, we have a guy on the team who writes about that a little bit, but that markets pretty small relative to the public markets.

1:09:59.8 : And most of the debate is about the public markets and the secondary markets and Exxon. And it’s interesting, I’ve definitely, I mean, I was skeptical to begin with. Somehow, I’m like, even more skeptical. But your point is, is well is well made. And I think it’s I’m curious why I haven’t read or heard that more, though. I the only time I hear what you’re saying is from somebody who might not even believe in climate change is coming from the right. They’ll be like, Oh, it’s all it’s all bullshit. Bs. You’re saying it almost like as the same as the BlackRock person. You’re, you’re so into this goal. This is a distraction. It’s interesting how those two people can have the same view. Yet they one is like, doesn’t even think climate change the risk. The other one is hardcore into it, but they have the same actual view of the SDSS. I find that kind of interesting. Just saying.

1:10:57.3 : Well, what might be useful for you, Eric, is that, like the very same types of analyses and exclusions or tilts or whatever else would be much more useful on the bond side, because actually ETFs participate in primary markets as well, or they contribute to demand in primary markets. So actually just applying some of the very same tools and filters and so on so forth to the bond side itself would be, you know, genuinely useful. So shifting the conversation to the very same to the very same companies, but with a bond ETF instead. That’s in fact, my team is scoping a bond index for that reason, because there just isn’t enough out there. There’s so many, so many. There’s a couple of green bond ETFs, but honestly, you know, my mind has been changed there. I will, I will, if we’re going to, you know, take a positive approach, we’ll stick to the bond side. 90, you said 90% of capital comes from debt, the debt side.

1:12:02.7 : 90% of new capital.

1:12:04.9 : Yeah, that’s it. Okay. That’s a great stat. But most of the debate, action, energy is on the equity side and the products. There’s very few bond ETFs that are ESG, but there’s, I don’t know, maybe 10. But there’s 200 ESG ETFs that are equity.

1:12:23.6 : Exactly. And by the way, I’m also skeptical of green bonds, but we don’t have to get into that now. But I think just like applying some of the same exclusions that you might apply on the public to the bond side. I also would like to particularly emphasize companies that are building new fossil fuel infrastructure that lock in demand and dependence on Russia also. So power plants, pipelines and so on. That’s the stuff that is going to be the source of more lock in. So that’s a good focus. Real quick.

1:12:53.8 : So you want it’s green. It’s the ESG screens, not green bonds. Yes. Yeah. Okay. Yeah. Now, here’s a question for you. Just real quick. I know, I know we’ve been on this a long time, but what’s your take on nuclear power? And thus use uranium minor ETF. I actually thought this might be green investing for realists because doesn’t nuclear really have to be a huge part of how we’re going to get to net zero?

1:13:27.6 : Sarah, do you want me to open up this can of worms? Are you welcoming this? Okay. So there are so many different considerations here. One thing to say, like you’re going to get me in trouble with my family, by the way, in answering this question. I would say keep the German nuclear power plants open. Like any existing nuclear power plants. Like if the alternative is to shut them off and run coal plants, like don’t do that. Seriously, keep them running, comma, however. Nuclear is really expensive and it isn’t actually, it’s not as flexible as other things. What we really need now in the grid is flexibility to be able to balance out renewables. And again, the cost, like it is really expensive and we actually don’t have enough uranium for this to really solve a significant percentage of the problem anyway. And it takes a really long time to build. And electricity has to be decarbonized before anything else. Like we need to do that right now. And the pricing is already there for us. Like renewables can compete with coal in all major markets and is nearing that level with gas pretty much everywhere as well.

1:14:37.8 : So yeah, I don’t think building new nuclear power plants is going to help us very much. It’ll cost more and it’s not going to be as adjusted. Like you have to, it’s a blunt tool, a nuclear power plant, right? You can’t just turn it on and off and so on. That’s a big issue given the shift in electricity systems that we’re seeing.

1:15:00.1 : Yeah, but the idea is it’s 24-7-365. This is, again, this is Bill Gates quote. I think Elon’s comment on it, they both seem pretty, Bill Gates in particular, but Bill Gates, I shouldn’t listen to Bill Gates. Yeah, I agree. I disagree with Bill Gates on quite a few things. But like there isn’t enough uranium anyway to make much of a dent in the problem. And again, like we have to decarbonize electricity now. It’s going to take 10 years to get those plants online and we can build a lot of renewables in that time and then do things like, I mean, I think we should probably do fairly simple but expensive stuff like pumped storage, which doesn’t rely on batteries. But like we’re going to end up with really cheap renewables and some like much more expensive but adjustable stuff because we actually don’t need power 24 hours a day, seven days a week. That’s the thing. We have peak times. We have to manage that. If we have grid upgrades, which are, by the way, insanely important, we can end up in a situation in which people’s electric vehicles end up kind of balancing out renewables because cars sit most of the time actually.

1:16:14.6 : So there can be a store of energy for when it’s needed. Anyway, I just think, I don’t think nuclear is the solution that people think it is because of the timing, the cost, the lack of flexibility and again, just like the nature of demand for electricity in the first place. But keep the ones that are already open. We’ve been talking for over an hour here.

1:16:44.0 : Okay. Well, I mean, I learned a lot. The thing with this is there’s so much to unpack. That’s why we cover it. It only makes up 2% of the assets, but it’s probably 10% of our coverage. But obviously, it’s not something I’m an expert in per se, but I’ve had to get really read up on it. But my sniff test, a lot of my alarm bells went off, just early sniff tests. Wait a second, especially the way the media was really pushing it. And this fits a lot of what the media likes to write about. And so my big thing was just sort of, but I definitely, a couple of things changed my mind today. So appreciate that. 1:17:29.0 : Well, that speaks to your cognitive flexibility. So that’s amazing. All right, good. So listen, everybody, did we convince you that ESG sucks? Drop me a line on social media and let me know. You know, I love these kinds of debates on there. And by the way, tune in for the next one by subscribing to my show, and please rate and review as well. Thanks, everybody. See you next time.

Grill investment management LLC does not guarantee any specific level of performance. The success of any strategy, the Grill investment management LLC may discuss or the success of any program. Nothing within this content constitutes legal investment or compliance advice. For such advice, contact a legal compliance or investment advisor. Grill investment management LLC will strive to maintain current information, however, it may become out of date. Grill investment management LLC is under no obligation to advise users of subsequent changes to statements or information contained herein. This information is general in nature for specific advice applicable to your current situation. Please contact a consultant or advisor.

Podcast transcription may differ from original recording and Grillo Investment Management, LLC may not be held liable for such differences.

Sara Grillo holds shares of Tesla, TSLA, in her personal account at the time of this blog being published.

The post Keep your clients far away from ESG investing – it’s a rip-off! appeared first on Sara Grillo.

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As the move to transparency in financial planning takes hold, regulations are changing in Colorado and other states. Here’s the triumph of virtue that financial planning transparency will (FINALLY) bring to planners across the country and the benefits to clients that come along with it. Get ready for an exciting show, folks, whoo hoooo!!!!!!

We welcome Dwight Dettloff, CPA, CFP, and Knut Rostad to today’s discussion.

Let’s get into it, folks! We’ll cover:

What does it mean for financial planning to be transparent?
What are the changes in Colorado investment advisor regulations regarding financial planning?
What is happening in other states regarding reform of financial planning regulation, and why we expect these changes to become more widespread.
What should financial advisors do?

The move to financial planning transparency is aflame!The Transparent Advisor Movement’s mission is to promote ideals of:

Clarity,
Modesty,
Integrity,
Fairness,
Logic, and
Client advocacy

in all aspects of financial advice, with a special focus on Advice Only, Flat Fee, and Hourly service models. There is an emphasis on logical and clear disclosure of services and their related fees.

The goal of the Transparent Advisor Movement is to create the country’s best financial advisors – the most ethical, effective, and successful financial advisors that the industry has ever seen in its history. To do this, we are dismantling many of the norms and reconstructing them with a sheer focus on the experience of the end client, something that has never been done before.

Specific examples:

Educating financial advisors of all business models (AUM, fee only, commission, etc.) about how to run a business with higher transparency to the client
Executing outreach to college students to encourage them to avoid predatory wirehouse and insurance training programs and pursue fee-only paraplanning jobs instead
Working with advocacy groups to influence policy, law and governance
Mentoring younger advisors
Matching up advisors one on one to be accountability partners and support each others growth

Today I have a few influential members of the Transparency Movement here with me and we are going to talk about the changes occurring within state legislature as this movement unfolds.

Knut Rostad is the president of the Institute for the Fiduciary Standard and fiduciary defender.

Dwight Dettloff, CPA, CFP® is the founder of Winding Trail Financial Planning in Colorado.

Financial planning changes on the minds of state regulatorsWith the rise of alternative fee models such as flat fee and advice only, there is an important discussion among flat fee and some AUM advisors about the relative benefits of each model. Within this context, regulators have started to raise their concerns related to alternative fee models than AUM.

There is an organization at play called NASAA (North American Securities Administrators Association). Their concern is to unify the state administrators and address what concerns them. They often come out with model rules, recommendations, and advocate for the states in Congress and at regulatory agencies such as the SEC. The issue of financial planning transparency has become important to NASAA based upon what their state regulators are finding in their examinations.

Colorado financial planning regulations are in reformColorado is a good place to begin when discussing the reform to financial planning regulations that is currently underway. Colorado regulators came out with a seven-page memorandum in March 2022 expressing their experiences and concerns about what their examiners have found from flat, fixed, and hourly advisors in their jurisdiction. They revised this guide in November of 2022.

Advisers regularly have questions on how they can be appropriately compensated for the ongoing work that they complete throughout the year. At the same time, Division Examination Staff (“Staff”) has found that many ongoing financial planners are unprepared to respond to Staff inquiries about fees and work performed made during regulatory examinations. In these instances, Staff has found advisers unable to produce documentation demonstrating the financial planner-provided services to clients, the detailed accounting of fee to work deliverables, itemized invoices as well as clear and detailed fee schedules. The Staff would like to work with advisers to assist them in developing a business model that better meets clients’ needs and complies with existing regulations.

-Colorado Department of Regulatory Agencies. Division of Securities. November 2022

What the essentially expressed concerns about what the extent to which they found that many advisors could not answer questions about the nature of the services being offered and the fees in total that are being charged. Regulators are trying to make sense of what they are seeing in these individual cases. Since March 2022, the CFP Board, Michael Kitces, the Institute for the Fiduciary Standard and the FPA, among others, have provided commentary on the memo.

Reform and the advent of higher financial planning transparencyWhat flat fee advisors represent is something new to the regulators and is clearly apart from what they have traditionally seen from the advisors in their jurisdictions who are charging AUM. It’s possible there are good faith misunderstandings as this set of services is unrelated to the management of investments which is their core competence.

Regulators, not just in Colorado but across the country, are seeking ways that there could be greater clarity in the disclosure and communication in the fees that flat fee advisors charge and what they provide. The primary disclosure document cited is Form ADV as opposed to an engagement agreement.

Regulators’ worries are justifiedIt makes total sense for regulators to have concerns about flat fee models, based upon the financial planning transparency movement being in its nascency and a potential lack of clarity existing.

One of their pressing questions is, how do we know that the flat fee is reasonable?

Let’s look at an example.

If somebody has a $500k portfolio and we just use a standard 1%, they’d be charged $5k a fee.
If you charge them a flat fee of $5,000, all of a sudden Colorado regulators (for example) would be asking, well what are you doing for them?
If that $500k were a 401(k), not directly managed by the advisor (or let’s say that it were a business owner with no assets at all), the state would need to come in and ask if the fees the advisor is charging were appropriate.

It’s a lot easier for the state to find a 1% AUM fee reasonable because they can point back to the money the advisor is managing. There is a record of it. The assets are held at the custodian, the fee comes out, and the act of the assets being held at the custodian under your oversight implies that there was a deliverable (monitoring, rebalancing, etc.).

Some difficulty comes in here. With a flat fee, the fee may or may not come out of the assets held at the custodian. The services do not have the appearance of being directly linked to the fee, as they would be in the AUM case. The regulators don’t want an advisor charging $5k on a $100k portfolio because that is a 5% fee which is deemed unconscionable. They would never have approved a 5% AUM fee.

Given these types of scenarios, it’s understandable to see where the states, in the face of being confronted with flat fee advisors that they have jurisdiction over, would have a high need for transparency into what the advisor is charging, and what exactly they are delivering for that fee. It’s totally understandable to see where they are coming from.

How can advisors provide reporting that fulfills the transparency needWhereas an AUM advisor would have an easy enough time answering the question to regulators of “What did you do last quarter for your fee?”, there is an understandable lack of clarity as to what the answer to that question is likely to be from a financial planner.

When you look at the range of what a financial planner could deliver it is broad. Some define it as a document, others as a service. The State of Colorado, in their memo, objected to use of the term “comprehensive financial planning” with no further definition to it. What does that mean? The term is not well defined.

Further, not every month is going to be as equally busy. This is a service that is driven by needs and wants in the client’s life. Some months will be busier than others.

Lodestar Financial Planning does a great job providing clarity about what their financial planning offering entails. This level of transparency is a step in the right direction.

What is the nature of the reporting that would satisfy the regulator’s need to justify services rendered over a contract period.

Will advisors have to provide 200 page reports?

Or is it just a quarterly list of bulleted points, such as this example from Axis Capital Management?

What can advisors do?* Be as transparent as you can be in how you present your financial planning offering. Here are tips. * Get involved with your local regulators. Help educate and open their perspectives so they can create regulations that will allow them to serve their jurisdictions better. As a practitioner your experience is valid to this goal. * Some states have Town Hall style meetings where you can voice your views. Attend and voice your views!

Opportunity to take a big step forwardMaybe these new financial planning regulations could lead us to a place, a more elevated level of service that will make planners more effective in aligning with the needs of their clients. There’s too much relying on the client to have to make sure there is value provided. If it were forced upon the planner to clearly detail exactly what it is and what it costs, that could be the biggest step forward the industry has ever taken, engendering more trust from the public and dispelling much of the negative reputations that the industry has.

What do you think?

Sara’s upshot on financial planning transparencySo there you have it – hope this podcast about changes in financial planning transparency was useful! Guess what – we’ve got a leeeetle bit of a movement going on!

Join our next Transparent Advisor virtual meetup.

These meetups are free and the goal is to learn from each other about how to grow and manage a transparent wealth management practice for the benefit of clients.

Even if you can not make the meetup, or even attend in its entirety, please register for the replay and to be notified of the next one.

Our scheduled meetups are here:

January 11th, 2023

February 8th, 2023

March 8th, 2023

April 12th, 2023

May 10th, 2023

June 14th, 2023

July 12th, 2023

August 9th, 2023

September 13th, 2023

October 11th, 2023

November 8th, 2023

December 12th, 2023

SourcesColorado Department of Regulatory Agencies. Division of Securities. March 2022. Ongoing Financial Planning Guide. https://drive.google.com/file/d/1uoEh8yZUPr6LovQyMQhmeW1Ufp_lgUVW/view

Colorado Department of Regulatory Agencies. Division of Securities. November 2022. Ongoing Financial Planning Guide. https://drive.google.com/file/d/1uoEh8yZUPr6LovQyMQhmeW1Ufp_lgUVW/view

The post Financial planning transparency is FINALLY upon us (whoo hooo!!!!!!!!!!!!) appeared first on Sara Grillo.

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This debate went psycho at times. Watch as all h&#@ breaks loose discussing the question of broker vs. financial advisor, commissions, fees, value, and more! This discussion was not censored – but maybe it should have been.

We talked about:

What is the best, fairest fee model for the client?
Do conflicts of interest matter as long as they are disclosed?
Are low fees better than high fees?
Does the way you are paid dictate how you serve clients?
Does the AUM fee model represent a conflict of interest that needs to be disclosed?
Should advisors be required to disclose fees in dollars each year and/or each time a product is sold?
Are clients capable of determining when your fees are too high or should there be some other standard that fees are measured against (e.g. hourly rate, industry benchmarks, etc)?
What obligation do advisors have, if any, to explain to clients the different fee models available to them?
In the absence of a securities account, what value do you provide to your clients?

The debaters are:

Charles King

Scott Salaske

Doug Twiddy

Derek Robinett

Michael Pinkans

Chris Randall

Matt Pruitt

And me! For those of you who are new to my blog, my name is Sara. I am a CFA® charterholder and financial advisor marketing consultant. I have a newsletter in which I talk about financial advisor lead generation topics which is best described as “fun and irreverent.”

I am an irreverent and fun marketing consultant for financial advisors. Does it matter that clients know the fees they are paying?In this clip we debate whether or not it’s important that the client knows what fees they are paying. And, if so, what fees are included in the definition of “all the fees.” Is it just the fees that are directly debited out of an account, or is the cost of a product (such as an insurance product) relevant? Is that a fee? Should brokers disclose that cost even though it’s not technically classified as an outright “fee”?

What do you think? Is it important that the clients know all the fees or just some of them? If the fee isn’t coming out of the account directly (but rather embedded in a contract) is it still relevant to the cost discussion?

Do RIA firms give away the hard stuff for free?A critical question in the debate of financial advisor vs. broker is what is value? What is the value of the services provided, and how is this determined? This can get complicated when services are bundled and provided for one inclusive fee, which in certain cases (AUM advisors) is calculated off the amount of assets the advisor is managing.

It’s an important question because how you are compensated determines your motivation for what you do. If your fee isn’t tied directly to a particular aspect of service, you may be less inclined to do a great job because there is less of an incentive. Theoretically a financial advisor or broker should do the best work no matter how they are paid – but in reality time is a resource and how it’s allocated does tend to go in the direction of where you are earning.

Do you agree? Or are we being too tough here?

Should clients be the ones to judge if they got a good deal?In this clip, financial advisors debate against brokers about whether or not it matters that the client knows the fees they are paying, so that they are able to judge whether or not the service is worth it. Some may feel that the broker or advisor should be the one to make that decision. Others feel that is too subjective a decision and that the client should be given the full information that way they are informed enough to judge for themselves.

Does a service become more valuable just because the fee is disclosed? If not, then why is it necessary to do so? The advisors hashed it out vs. the brokers on that one.

Here it was also debated if the value of any service can be assessed when the outcome is not guaranteed. The advisor vs. broker repartee became very pronounced here as the advisors felt that value didn’t depend on outcome, whereas the brokers felt that the outcome must be guaranteed in order to claim you are providing value.

Other notable points in this debate:5:01

The agents made the point that it’s strange to see clients losing money to fees and also losing money to the market.

5:05

“Do you think it would be important that the client understand how much fees they are paying?” – Matt Pruitt

7:55

The advisors made the point that the cost of insurance can’t be separated from the “cost of service” or the commission the agent makes.

11:10 The point was made that even though AUM fees and flat fees are more transparent than commissions, it doesn’t mean that the advisor did a great job for the client.

Here’s where the debate hit on a critical topic, which is the question of value. The agents said that without knowing the outcome upfront, it’s impossible to know if the advisor provided value. The advisors said that is not true, and that many times even with an insurance product you don’t know what the outcome will be.

9:37

“Does the customer, before that paper is pushed over to them, accept that they got a good deal?” – Mike Pankans

At 11:51, Chris Randall had a great quote. He said, “The fairest fee model is one that clearly describes the price the client is going to pay and what services are included in that price. Insurance does not include the price that the client pays for the service. It is…jumbled up with all the other costs of the product.”

The agents then came back with the rebuttal that if the agent believes that the client got a good deal, then they got a good deal. The agents say that they shop the policy to make sure the client gets a good deal.