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Financial advisers Cody Mendenhall, left, and Ron Penney discuss how not to give into fear.
Financial advisers Cody Mendenhall, left, and Ron Penney discuss how not to give into fear.

CEO Roundtable: Financial Advisers

Posted online
What’s America’s financial future look like? Springfield Business Journal Editorial Director Eric Olson sat down with financial advisers Cody Mendenhall of Pension Consultants Inc., Ron Penney of Penney, Murray & Associates/Ameriprise Financial Services and Brent Singleton of Heim, Young & Associates Inc. They talked retirement planning, the stock market and how not to give into fear.

Eric Olson: How would you describe the wealth management industry in one word?
Brent Singleton: I would say opportunity. The need for good financial advice has never been greater. When you look at the demographics of our country, we have 10,000 baby boomers retiring every day, and that’s going to continue for the next 10 years. When you think about that, you’re talking about over 35 million people who are going to retire and they’re really seeking sound financial advice. In addition to that, our industry is aging as well. I think the average independent financial adviser is 60. Our industry is shrinking as the need for advice is growing.
Cody Mendenhall: Yeah, my word is kind of along those lines: help. It’s help on both sides.
Ron Penney: I’ve been in business 33 years and it looks like to me that we have more change going on now and less volatility and more optimism than I’ve seen in a long time.

Olson: The fiduciary standard regulation was introduced last year. Are you still waiting to see the effects of that?
Mendenhall: Yeah, the fiduciary rule was to be put into place effective in April, but then some orders recently from the president and the Department of Labor came to delay those a little bit longer.
Penney: Yeah, those remind me of Y2K. I spent a massive amount of money on computers and software and all of a sudden 2000 hit and nothing happened.

Olson: What did you guys see that was able to level it out?
Penney: I think the fee structure. I remember when we first started out, we were charging 8 percent for mutual funds and I remember 25 people quitting my firm one week because they cut it to 5 percent. They all jumped to Edward Jones. Then two, three months later Edward Jones dropped it to five. It’s a very complicated world when it comes to finance – and what the end user is paying and what the middleman is making and what the product manufacturer is making and what the trader is making. Full disclosure is challenging in any industry.
Singleton: Well, if we’re talking about regulation and the Department of Labor rule, the intent is just to have financial advisers and planners act in their clients’ best interests. That seems good on the surface, which it is, and frankly as a certified financial planner, you’ve been acting as a fiduciary for years already. For us, and other CFPs, it wouldn’t require us to change our business, but like any regulation, there’s a lot of unintended consequences. The costs associated with just complying with the regulations is the difficult part.

Olson: Building on that regulation, a 2011 Yale University study found about half of the time, the recommended stocks paid the financial adviser more than those not recommended. This raises the question whether recommendations are in the interest of the client or the adviser?
Mendenhall: I personally think it’s more of a business model challenge. The intent of the rule is to bring all of these brokers and advisers to this same field of what’s best for the client, so depending upon your setup, if your business model is based on this commission model of hidden fees, it’s probably a problem. If you’re fee-based and transparent about your fees, then again, we welcome it.
Penney: We give that full disclosure. One of the things about CFPs we all appreciate is there’s a lot of standards that are much higher than this law they’re passing.
Mendenhall: We actually had a coalition in our business that included the Financial Planning Association and the CFP Board that lobbied in favor of the fiduciary rule. The unintended consequence of regulation can be eliminating choice for people, forcing everyone to a certain business model that may not be the right fit for that particular individual. That’s why our industry is pushing back on some fronts.

Olson: Do you see it affecting the fee-based structures?
Penney: If you have to charge the same fee to a guy who has $10 million and guy who has $10,000, it makes the $10,000 not able to get advice or whatever because it’s really kind of a challenge. You have to make your model: If I’m going to spend a lot of hours trying to help this person not go deeper in debt, I have to charge a fee for that, but if a person has a lot of money I’m going to charge him a lot less to be competitive. If you try to make everybody the same, you’re going to mess up on both ends of the spectrum. You have to make something in the middle. You can buy a product cheaper and you can get advice cheaper if you don’t get an adviser because you don’t have to pay me to be there and don’t have to pay my staff. You pay for what you see has value, and more and more you can get value without having a person. The younger the generation is, the more savvy they are at pushing buttons and talking to Siri and the less they are going to believe they are going to need someone else in their lives until something goes wrong.

Olson: What about robo-advisers?
Penney: It works until it goes wrong. It works until you pull your money out when the market goes down because the robo-adviser said leave it in and you couldn’t stand it. An easy answer to the allocation model is that we all have robo-models from the day we pass the first exam and I can give you a model, but it doesn’t mean you’re going to be able to live with it. You may have  fear and greed and confusion that are the problems. It’s the fear of losing everything, the greed of trying to buy something that’s going to go up more than is really possible and it’s confusion of thinking you get something that is free.
Mendenhall: I think there’s a ripple effect in the industry because of the fee issue. One is the robo-advisers. That’s a new product for a different type of client, but I also think we’re seeing it in the retirement plan industry as well as the 401(k) industry. The mutual fund companies themselves are coming out with retirement share class, eliminating all of these revenue sharing, behind the scenes things.

Olson: Is there still a mix of those fee structures – maybe even hourly and transactional? What’s the direction fees are headed?
Singleton: What most people need to understand is what services they are getting for the fee. If we’re only talking investment, that’s where a lot of the costs are being driven down and in some cases, commoditized with robo-platforms and firms like ours. When you look at comprehensive financial planning, Vanguard, a low-cost investment provider, has an ongoing study called Adviser Alpha. The study looks at what value an adviser can bring to a relationship. They estimate a good adviser that’s providing tax planning, retirement planning, estate planning, investment advice on an ongoing basis, can bring in 3 percent per year, and that’s net. So, the average adviser charges 1 percent. If you provide good financial advice, you’re getting him a 3 percent additional benefit every year, but there’s a big difference between comprehensive advice and only investment advice.
Mendenhall: I would agree, and I think the allocation is definitely driving away from the commission based and more to the asset or the hourly. Commission based is still going to be there, in spite of the investment piece, but I agree that the bigger issue is the services you’re getting for the fee you’re paying.
Penney: That’s why the way I structure things, I try to make them understand what they’re paying for before they pay, because, “Why do I need a financial adviser? I’ve got a CPA, I’ve got a lawyer, I’ve got a banker, I’ve got a stock broker, I’ve got an insurance agent. Why do I need some financial advice?” See, that’s part of the problem. People don’t really see the value. It’s sort of like a plumber, until you start leaking everywhere and don’t know how to put it back together. This rule will do the same thing. You’ll see the pendulum swing and I think part of our issue now is that when we had a political change, the pendulum started swinging back the other way. We went from Hillary [Clinton] to [President Donald] Trump and everybody was in a state of shock. We don’t have a clue. We’re still waiting.

Olson: Studies show household debt is up 11 percent in the past decade. Now, the average credit card in a household is about $17,000, including mortgages it’s $135,000. Are you finding yourselves working with those people too? Are you kind of debt negotiators in a sense?
Penney: Yeah. I mean, take a physician, you are going to make $300,000, but it’s going to take years to pay off your debt. You have to figure out what to do. Keeping him from buying that $350,000 boat he saw and paying off his school loans instead is kind of a challenge.
Singleton: When people, individuals, have bad debt, it prevents them from focusing on their longer term financial objectives. You need to address that first and then get them to where now they can focus on one long-term objective like retirement, college education planning, whatever.

Olson: How much of a balance is there in those conversations? Is it 50/50 focusing on debt and long-term goals?
Mendenhall: It depends on how much debt, the type of debt and the interest rate. A lot of time we’ll say, “Address that first, because it’s a black cloud hanging over that family and then focus on long-term goals.” I think almost all of them start there because it is the base. Our company, we manage retirement plans, but our mission is to improve the financial security of the American worker. You cannot do that without first getting their finances under control. We’re seeing in our industry wealth, financial wellness, is the huge push now. Whereas, a lot of advisers want to talk about investments, investments, investments – but it really is about the debt and the budgeting.
Singleton: There are estimates that about half of the employees out there who are worried about their finances spend as much as two hours a day on the job worrying about their financial situation. Think about that from a productivity standpoint. When you think about your employees and half of your employees are worried two hours a day about their finances, that becomes a big problem if you don’t address it.

Olson: What are some of the most common questions and concerns you hear from clients?
Penney: The most common question is, “Will the Dow [Jones Industrial Average] keep going up?” I get that question at least three or four times a day. I say, “Well, it looks like it.”
Mendenhall: Questions don’t change much year to year. Clients have fear. Fear of, “will I have a medical issue later in life and be able to afford that?” Fear of, “currently I have a lot of debt and need to get that paid off.” Fear of where the markets or going to go or not go.
Singleton: Now, our No. 1 question from retired clients is, “Will I run out of money?” The AARP did a study a couple of years ago; people fear running out of money more than they fear death itself. If you run out of money, you lose independence and you just fall back on Social Security. Most people don’t realize Social Security is just meant to provide 35-40 percent of your working income.

Olson: Are there any hot investment sectors you see as being the most profitable in 2017?
Penney: Certainly small cap international sectors have been undervalued because the U.S. market keeps getting stronger. So that keeps coming up, “Put more money in foreign.” The whole bond sector is really confused about how much interest rate rises are going to affect which kind of bonds and that’s always an issue, so you have to try to adjust that.
Singleton: And the trap most people fall into is they give up on a long-term plan because of the short-term news cycle. Instead of owning a lot of different things, they own that one thing. Discipline is the No. 1 thing that determines the long-term success of an investment plan, yet we’re bombarded with information. Social media, 24-hour news cycle and the average investor winds up getting half the returns they should because they give into emotion and fear in the short term.

Interview excerpts by Features Editor Emily Letterman, eletterman@sbj.net, and editorial assistant Barrett Young, sbj@sbj.net.


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