Podcast: Brooke Southall — The Past, Present & Future of Wealth Management

Brooke Southall

Episode 53 of the NewRetirement podcast is an interview with Brooke Southall — Founder and Principal Reporter of RIABiz.com — and discusses the past, present and future of wealth management.

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  • RIABiz.com
  • Financial Advisor Fee Trends And The Fee Compression Mirage
  • RIA stands for Registered Investment Advisor – they have a Fiduciary duty (supposed to act in your best interest) and most independent wealth advisors set themselves up under the structure – they can be paid as percent of assets or by hourly fee . Many “Financial Advisors” were and still are paid on commission (salespeople) like insurance agents or stock brokers (broker dealers). Some advisors are both – so you really need to understand how your advisor is paid to understand their incentives. Learn more here.

Full Transcript of Steve Chen’s Interview with Brooke Southall

Steve: Welcome to the NewRetirement Podcast. Today, we’re going to be talking with Brooke Southall, the Founder and Principal Reporter of RIABiz.com. An online publication covering the financial services business about the past, present, and future of wealth management and investing. Brooke and I both work in Mill Valley, California, and we’re actually meeting live during COVID with masks on and a well-ventilated space. With that, Brooke, welcome to our show. It’s great to have you join us.

Brooke: Thank you very much, and I really like your studio with bicycles and windows flying open and your set up here. Very high-tech.

Steve: Thanks. Yeah, I think you’re probably the third guest we’ve done live. We’ve been doing so many of these things via Zoom, but it’s actually great to do it live, and I think the quality’s a little better. I just wanted to know if you could give us a couple minutes on your career and how you came to start RIABiz. What got you interested in the whole investment space and covering it?

Brooke: Well, going back to college, I was an English major whose friends are all economics majors and I finally decided I didn’t want to be alone. I went to their economics classes and became an economics major. But then I needed to figure out a way long-term to meld a literary bent with the fact that I actually did enjoy studying economics. I went through a whole progression as a rowing coach. I sold small businesses for several years, where I learned most of what I know I think. Then I actually got chronic fatigue syndrome because I was a rower who was rowing too much. I ended up taking a year off to try to recover and started to write articles for local newspapers to kill time and do something productive.

Brooke: I, basically, have just kept doing that to where I am now. But I ended up in San Francisco as part of investment news. I covered the West Coast, they basically put me in a little office in the Hearst building across from the Schwab headquarters and said, “Keep an eye on these guys because they’re at the middle of the RIA business.” I did that until I departed and didn’t immediately know what I was going to do. But spent about a year figuring it out and decided that I could, in fact, just do it on my own. Now, I’ve been doing that for going on 12 years.

Steve: Wow, yeah. It seems like you’ve built a great franchise. I’ve definitely seen it grow and also you’ve probably timed it right in terms of there’s been a massive migration towards people creating RIAs, independent wealth management shops. People spending out of brokerage shops, the J. P. Morgans and going on their own. Has that been a huge lift for you as you’ve grown the business?

Brooke: Yes it has. I would say that even in 2000, when I first started, all the hype we talk about now was already in full swing. Now, it’s just much more so. Yeah, by the time that I thought about starting my own thing, it was right in the financial crisis. I liked the idea that if I screwed up, I could blame it on the crisis.

Steve: Yeah, gets in that cover.

Brooke: Right. It was also a time when the print publications were all dying. It was a convergence of things going on in the RIA business, wealth management, but also in the publishing world.

Steve: Yeah. We’re here to talk about the past, present, and future of wealth management. A little bit, I guess, leading into your transition of starting your own company. You probably saw a lot in writing for investment news. What were some of the big changes that you were seeing leading into the around 2000, the crash, that probably caused some of these people to go spin out and start their own businesses?

Brooke: You mean leading up to 2000 or?

Steve: Yeah, leading up to 2000.

Brooke: Oh, leading up to 2000, I just think was that was probably when it was the worst to work for a wirehouse. But it was really hard to break away, you were bound to get sued. There was nobody there to help you. There weren’t all the consultants and services that there are now to make it such a smooth transition. I, actually, the URL I tried to get when I started was breakawaybrokers.com because every single time it was just this amazing story. It was like somebody escaping through the steel curtain. Those stories never are uninteresting. Those stories are actually pretty uninteresting. We have stopped writing about them because they’re just bureaucracy and moving paper around and so on.

Brooke: But it’s not as bad probably to work for a wirehouse today as it was then, you can be more or less fee-based and things are a little more transparent and so on. But, anyway, back then it was the worst FINRA nightmare, i.e. every single move you made was watched and you really were ripping people off who likely were your friends and relatives. I think those people who got out, got out with the zeal and a lot of them are still leaders in the business. Now it’s just a little bit more systematized.

Steve: Yeah. Do you think that a lot of the bad practices that existed in terms of churning accounts and putting people into high fee investments gone, gotten cleaned up in the overall space? Or do you think that still exists in certain pockets?

Brooke: I think it definitely exists. If you talk to big RIAs who have accounts come over to them from J. P. Morgan or something, not to throw them under the bus, but I’m just using them as a metaphor. They will say, “Holy cow, you just cannot even believe what’s in somebody’s old portfolios.” Because a lot of them just were built long ago and they were never… So yes and no.

Steve: That’d be interesting. Has anyone done any analysis of looking into legacy accounts? Because, heck, there’s a lot of wealth that’s been built up, a lot of folks. There’s a lot of inertia where they get in a relationship with someone in terms of a wealth advisor or a broker. They create a portfolio, then they let it go and it could be for 30 years. You could have these accounts rolling around with, I could say, I could hear that, I see that with that stuff. Has anyone looked in and said how much is out there?

Brooke: I haven’t seen a specific study on it in a long time. I remember Schwab did an actually good study back when I was in investment news, Koski Research. Looked at these types of portfolios. I remember there was some good research in there about what they were made up of. But I think the very fact that… what is it? Isn’t the mutual fund industry still at like $20 trillion or something compared to ETFs which are more like four or five?

Steve: Mm-hmm (affirmative).

Brooke: Mutual funds almost don’t even bother to advertise anymore because they can’t attract new assets. I think that tells, those assets have to be sitting somewhere. My guess is you’d look with the normal suspects of UBS, Merrill Lynch, Morgan Stanley, and some of the independent broker dealers too.

Steve: Yeah, I know. I remember a friend of mine went over to… he was looking at one of those wirehouses and interviewing and tried it out. Essentially, the process was, “Hey, we’ll train you up, give you a little bit of a draw.” But then you have to start generating commissions. It was really about targeting your friends and family, like start with your friends and family, go sell them and get them into this different products. I think they, to some degree, that’s a… and then turn people out because like, “Oh, bring some people in.” A lot of people can’t go beyond their friends and family and then they bail out. But then the assets, if they’ve been moved over, maybe they stick. It seems like a crazy strategy. But I remember one time I heard that one of these wirehouses, they got up and said, “Okay, your job this year is to get two net new clients for the whole year. It seemed like such a low bar, but it shows you how hard it was probably to do that business.

Brooke: Yeah, it’s very hard. I had a front row seat on it back in my younger days. I have applied for that type of job, I’ve been told that type of thing as an applicant, and I’ve been in sales. As a young person to go in and talk to somebody with $5 million, it’s a tough sale. Unless that poor person feels like they’re your uncle and they need to give the account to you.

Steve: Sure. Yeah. Well, I know it’s so funny that the strategy used to be just people would look at the, this is going way back, but go through the phone book, cold call people or target dentists or doctors or something and try. It seems like that’s dying off but, honestly, I still sometimes get phone calls that way. It’s crazy, you’re like, “Really, this is the pitch. You got some special stuff for me and let’s go.” But, hopefully, that’s winding down. Let’s talk a little bit about what’s happening today. What are some of the big trends you see now in the spin-outs and with people building wealth management businesses? There’s so many, but we were talking on the preamble here, or before we started, about just how fast it’s moving. There’s so many things that are changing across the system, but we’d love to hear your take on where you see the biggest changes and the biggest trends?

Brooke: Well, it is absolutely everything I can do to keep up with it. I think that I’m in a position to keep up with it as well as anybody. At the same time, we have not seen a company you would say, “This is the disruptor.” We’re still talking about the same companies 20 years, 30 years, 40 years later. I feel like we’re at the point somewhat where with electric cars or something where all the RIAs are the Tesla in a way writ large. Because all the new money and all the investment into creating an engine to attract those assets is all focused in, roughly, what you call the RIA wealth management space i.e. non-sales based i.e. somebody having to say, “They’re putting your interests first.”

Brooke: Brokers still don’t have to technically put your interests first. They have to put Merrill Lynch first. We still all drive Toyotas and Audis and so on. But it’s still cool when a Tesla drives by. But if you look at GM Ford, etc., the entire future is electric cars. I’m not sure exactly where we are in relation to that, but that’s how it feels to me. The bigger part of the future is in the future, and that said, the cottage industry of RIAs and then the sub cottage industry that supports that cottage industry is now an industry. There are every flavor, there’s every flavor period, but every flavor of vanilla too. In terms of the investor being involved, not involved, or somewhere in between.

Brooke: It is very hard to encapsulate it except to say it still leans so heavily on the human relationship because that’s where the trust lies. That’s why we are still doing business with the same names, Vanguard, Fidelity, Schwab, etc. They’ve remained the leaders. There isn’t really a new name in all that. For RAs, DFA, or any of the brands we’ve always heard about.

Steve: Right, it seems like they’re these huge players that are out there. Then there’s a bunch of these smaller spin-out, startup RIA shops that have tended to be very localized mom-and-pop shops, if you will, where it’s like a hand of couple RIAs or CFPs inside of a registered investment advisor with 100 families or 200 families. You’re starting to see bigger roll-ups. I know the guys over at Allworth they’ve got private equity money, and I know they’ve gone through a couple of transactions and they’re trying to really scale the traditional model still though. It’s still like the face to face, they just have more infrastructure. Any other players like that, that you see emerging? Do you think that’s the future that there’s going to be some big, a handful of these big versions of the local RIA, if you will?

Brooke: Well, I think that the answer again is yes and no, because as fast as better aggregators are aggregating with greater capability, the atomization and decentralization and spinning off by individuals to start their own firms keeps pace with that. Then you have these factories of creating independence too like somebody like Michael Kitces who now has hundreds of RIAs. I think he’s starting one a day or two a day or something like that the last time I spoke to him. You just can’t aggregate fast enough to keep up with the the number of startups there are and the people who break away, etc.

Brooke: When we talk about something like Allworth or Focus Financial, or some of the better known roll-ups, Joe Duran, Mercer, it’s never that many firms. We’re talking about dozens at most, in most cases. I don’t know, if you added up all the aggregated advisors and put all those assets into one number, it would be a fraction.

Steve: Yeah, it’s interesting. It feels like the individual advisor is incented. Since it is such a people based business, if you build your practice as an individual or with your partner and you’re part of a larger thing and you’re like, “Well, I could spin off and do this myself and keep all the economics for myself.” That’s what happens, and that’s why people end up leaving the wirehouses and now it’s hard to keep them together inside these roll-ups, I think.

Brooke: Absolutely. Because the reason they were available to be rolled up is because, at one time, they were so independent, they had the guts to leave. I don’t think that DNA has left them. They may, after 20 years of being independent, thought the grass was greener back on the other side, again. Being part of some bigger group where things are a little more… somebody is organized. But it’s fairly inevitable those people get the edge again.

Steve: Yeah. What do you think about the FinTech movement and just the investment activity? There’s these individual people spinning out but then there’s also we’re talking about Personal Capital or Betterment and Wealthfront. There are these robos that are getting launched. There’s obviously Robinhood and groups like that. Just it feels like there’s a ton of, that we know, there’s a ton of investor activity, venture, and private equity in this space. How do you see that affecting the ecosystem?

Brooke: Well, I think that when you and I probably left college and we went and didn’t start a company right off the bat. We learned on somebody else’s dime. I feel like every time that there’s a new tech company or venture or whatever coming from the outside, that’s what RIAs are doing, Because, in the end, it always seem to accrue to their benefit. They ended up using this technology. They ended up having investors made out of savers that then someday graduate to an RIA, etc. I think there was a great debate between Dan Sievert and Mark Tibergien at a conference a couple of years ago in Newport Beach, and they argued whether private equity was a positive or a negative for our industry.

Brooke: They came out the stronger argument was that it had actually been a net negative. They were talking about it largely in the context of roll-ups and that sort of thing. But it was interesting because I had always assumed it was a net positive and I still do. I think if you look at all the particulars, it can be you can look pretty negative. But after all that, what money washes through and energy washes through and so on, I think it speeds up evolution.

Steve: Sure, yeah. I think in most industries that even if there ends up being a bubble in a particular industry, it creates more capacity, creates more experienced people. There’s going to be a downside of the bubble in the short-term, but then long-term, it’s lifted up the overall look. It’s a rising tide for the overall industry longer term, so I could see that. Interesting. Any thoughts on the big trends that you’re seeing for retail investing or business models out there? Do you see that changing? It’s finished in a watch like free trading flow through this space. Any thoughts on other things that you’ve seen or that topic?

Brooke: Well, that topic is a good object lesson, and I think it’s because… Ironically, there is a, well not ironically, but there is a capacity issue in this industry. I just listened to the whole, well, I guess my reporter just listened to the whole Schwab conference call with Wall Street. Two and a half hours of them explaining why they don’t have nearly enough capacity at a time when they’re trying to do a merger. They have a lot of the issues that Robinhood has. They also don’t have enough capacity to keep up to their own standards with servicing RIAs. You’re sitting back saying, “Holy cow, here’s the most, the biggest, most organized company out there trying to find the capacity. But the smart people in this industry, namely Mark Tibergien, has always said this was an industry with a huge capacity problem.

Steve: You mean capacity to deliver planning and advice?

Brooke: Well, anything though. We don’t even have the capacity to do the trades nevermind the planning and advice and the handholding and the just being there for people, or whatever you might define as wealth management.

Steve: Yeah, educating people.

Brooke: Educating, etc. Of course, the answer is, “Well, why don’t we just automate a lot of this?” That is, in fact, what is going on, but people simply you can lead them to water, and there’s only so much they’ll do for themselves no matter how much that makes sense. Everybody’s trying to move things along, but then a lot of times it ends up being cutting corners. I think when people feel like you’re cutting a corner at their expense, when it relates to money, it just doesn’t go over. I think that’s why, bizarrely, this RIA model, which is really actually like a 40-year-old model at this stage.

Brooke: But, in fact, goes all the way back to whatever the investment act of 1930, whatever it was. It’s been around on some level for rich people, at least, forever. That’s why it just weirdly keeps growing, the fees haven’t even been compressed. It’s an anachronism, right?

Steve: Right, yeah. On the fee topic, it’s interesting. One of the things that’s been surprising to me is that wealth management fees aren’t going down. I think the average fee is 1.3% if you do the assets under management model. It’s almost like the real estate space where when we bought our house and looking back with the internet, it’s like, “Well, why are you paid 5 or 6% to sell a house?” I really thought, for instance, this house, we could get away from that. We ended up using a broker, anyway, we negotiated it, and it still hasn’t changed. It’s still under attack. You have the Zillows and Redfins looking at, and there’s new companies where you can just buy remote that are definitely pushing on that.

Steve: But, yeah, these fees are still persistent. Back to Kitces as well, he was making comment that really it doesn’t seem like these are going up, it feels like services are going up. So people are having the advisors feel like they have to do more to justify the fees.

Brooke: Right, and I think that’s you could challenge that. Because advisors are still in a very comfortable industry where plenty of RIAs work very hard, but they are not emergency room doctors. Chasing down every issue in your life and so on and so forth. They just keep an eye on it and-

Steve: Yeah, make sure that you feel good, you get a trusted relationship. Someone that hopefully knows what most of them do, but not everybody really knows what they’re talking about and gets you in the right kinds of investments. And make sure you don’t do anything crazy, especially, when things are in turmoil. That’s when they really earn their money is when there’s a lot of turmoil if they talk you off a cliff from like selling everything at the bottom, which is what most retail investors do.

Brooke: Yeah, and I think that sounds so… I don’t know if the word is, but it doesn’t sound like such a big deal. But it’s just a monstrous big deal, that it’s that they are short of this insurance policy on your own insanity around money. Even very sane people are very insane about finances.

Steve: Well, what’s funny about the market is that you have to make some big decisions, get it right and not shoot yourself in the foot. Talk about if you miss the 10, whatever, best days in the market, you’re going to miss half the upside or something like that. It’s really you have to be in the market, you have to stay in the market, you have to not sell at the bottom. I do see that. If you’re not able to do it yourself and an advisor can get you to save regularly, invest, have a broad portfolio, stick it out and ride that off for 20 years, they’re going to add a huge amount of value. Because if you weren’t going to do that and you just save your money, you’re going to give up a huge amount of the games and you pretty much need to capture that compounding in order to have a secure comfortable high quality of life as they get older. When they can no longer work to make money. I totally get that.

Brooke: Yeah, you could rename RIAs like consultants of assured compounding.

Steve: Yeah, that’s right. They’re coaching you and getting reinforced in those decisions. I would like to talk about on this business model. There’s definitely been an evolution over the course of our careers, where it used to be commission-based selling of products. Very often these products had high fees, and then there was churning and a lot of stuff has gotten cleaned up. But I remember even when I worked at Schwab, it was like daily average trades. It was all about they made money on trades, and I think, originally, Schwab used to start from 70 bucks a trade, and then it was like 20, and then it was 10, and then it was now it’s free. Now it’s we moved to the AUM model.

Steve: I have one comment on this slide, I’d love to get your take on it. Just what’s odd about this space, these folks are fiduciaries, but the fee structure is still not communicated clearly. It’s only now getting enforced by the government that you have to publish what the fees are on these statements and translate it to income. But what’s your view on that? Where do you see people… How do you see RIAs talking about that?

Brooke: I think that is really putting your finger on something that is an ongoing mystery to me. Which is how the fees can remain so hidden by, not just Wall Street, I don’t think RIAs are very upfront about it either. You tried digging through an RIA’s SCC documents i.e. either ADV, and good luck. First, you go to the ADV, well, there’s nothing really there. Then you go to the ADV 2, and okay, it says here that this and that. But they might do a different fee for a different person and, “Oh, by the way, we’re going to put you in this investment thing, which it’s all has its own fees. Yeah, and by the way, we’re going to charge you for your plan and that can be this amount of hours, but then it could be that.”

Brooke: The whole thing’s a big mash. Then, meanwhile, there’s never an all-in fee. What do I pay when this is all said and done? When including the underlying ETFs, etc., etc. When people have asked me, “Well, what would you do if you were to try to disrupt this industry?” I’ve always said, “I would actually do as an RIA, what RIAs say they do and be the first one ever to do that” Be really aggressive about telling people exactly what they’re paying. Because on top of the fact that nobody knows what the fees are, in our business, you don’t even have an invoice or anything else. The money is just magically vanishing, which-

Steve: Yeah, you don’t even know it’s gone because you don’t see it.

Brooke: Yeah, right. They’re good reasons why the companies do that, and you can even make a really good argument they’re doing it for the good of the consumer because the consumer is insane about its money. And they’ll immediately get fixated on those fees instead of the bigger picture, which you and I just spoke about. Namely, it really comes down to not panicking at the wrong moments.

Steve: Yeah, so I hear that, but I think why is that tied to this business model? I hire lawyers, CPAs, doctors, dentists. Like I was talking to my dentist yesterday, who has high costs, but they do a great job. But, at least, we have a transparent conversation about what it is and why it’s that way. Why do you think, I mean, it’s so not transparent and no one has come out it just straight up. There are like Garrett Financial, there are some groups that are doing this, but it’s by far the exception.

Brooke: It is by far the exception, and I think to give a really Orwellian answer, it’s a cultural thing. But I do think that it’s a little bit underrated that other professionals have… I think other professionals do have complicated fees. Maybe just a handful of times in your life as a consumer, you’re dealing with big dollar amounts that you’re negotiating directly with the professional who is providing that service. If I get sued, and I have actually, all of a sudden, you’re in this very intense situation where the fees, you feel dumb bringing up the fees. If you’re having a house built for $3 million, you’re dealing with a contractor, there’s plenty of room for all kinds of crazy things, etc., etc.

Brooke: Certainly, I’ve had that with doctors, etc. I do think it’s not just advisors. That said, advisors can get you year in and year out and it goes right to the heart of your lifeblood, namely, your finances, and they’ve got it down to a system.

Steve: Well, I do think it’s a big part of why the first move is, “Okay, let’s win you as a client but let’s move all your money into my custodian.” Then we’ll take care, within the rash of it, the communicated benefit is, “Okay, it’s in my custodian, I can help you manage it in here and give you ideas, or if you give me authority, I can make trades on your behalf and rebalanced portfolio.” Great. But the other big reason is I can take fees directly, I’ll get paid by the custodian according to this contract we signed, but I will never send you an invoice for this. Like a simple thing would be just, yeah, there’s an annual invoice that you can see what your all in fees, all in load is, and how much is for the funds? How much is for the advisor?

Steve: I think that will transform the space, but I doubt we’re going to see… we’re not going to see it from inside the industry today. There’s no reason. You can have an advisor. I’ve got a 100 families that manage $100 million, they charge 1%, I make a million dollars a year. Babysitting is money. It’s a great business, right, who wouldn’t wan to do that?

Brooke: It’s a great business. But then you have to ask yourself, why is a great business that is designed for people to get rich doing comfortable work have a lack of capacity?

Steve: Right, that’s a great question.

Brooke: I think they’re good answers to that, but you can’t look at it financially. I think, historically, going back to the money changers or whatever, people have not wanted to deal with money. It is like the white collar equivalent of being the garbage holler or something. If you’re in the presence of garbage all day, then theoretically, it’s not a high quality of life, or if you’re a plumber. But if you’re in the presence of money all day and the agita of people in the presence of their own money, I think there’s some battled pay maybe that you’re getting even if you’re playing enough golf and meeting people at a teak desk and never getting your hands dirty, whatever. I presume that’s-

Steve: Yeah, of why that exists. It’s a great question, it’s true. I think the average financial advisors like over 50 at this point, and they’re looking forward. If there’s a capacity problem now, it’s going to get worse on the advice side because these folks are going to retire. If there aren’t new people coming in to take over, it’s either going to get fully automated or it’s not going to exist. Have you had any discussions with folks in industry about how they want to tackle that problem?

Brooke: Well, of course, because it’s just an ongoing alarm, or red flags being risen on that topic. Again, it blows my mind that for all the bright young people coming out of college wanting to earn a good living and doing something useful for people and so on, why you can’t hire advisors all day long? But, apparently, you can’t, at least, right now. It is a strange thing, but I don’t think it’s something we can go out and do something about. Other than to have faith in the free enterprise system and be pushing on every front and presume that people will act in their best interest and take a good job.

Brooke: I do think that everything that is happening is creating a higher quality of life for the financial advisor to the point where it will attract more good people and the problem will somehow solve itself. But, yeah, for right now, a financial advisor is somebody who combines a whole series of qualities that are hard to find in one person. They’re sufficiently nerdy to get down to the numbers. They’re sufficiently affable that they can talk to somebody. They took, at least, one English course. They can speak, explain things pretty well. They can work with technology. In the case of RIAs, they know enough to be an entrepreneur, how to hire other people, how to communicate to those people, how to provide a quality of service that they do.

Brooke: They know how to sell because even if you’re not a broker, you got to sell if you’re going to get somebody to pay you $20,000 a year for what seems like a very intangible service. To go out and manufacture those people who also can look over the entire financial landscape, something like the situation we’re in right now, which nobody can seem to get their mind around how we could be still deep in a plague. And the market is roaring and the economy seems to be terrible, and it seems to be good at the same time. To know, bottom line, what do I do for my clients and make them feel okay about it?

Steve: Yeah, right. Yeah, no, it’s true. It’s that you’re making a great case for the value here and the skills required. It’s great to hear it in your words. What do you think, looking forward to the future, where do you see opportunities in this space and how do you think some of this is going to play out over the next, call it, five, 10 years?

Brooke: Well, I think that it’s just opportunity everywhere you look. I would say if somebody were coming into this space, either as an investor or as a person wanting a job or somebody doing a startup, I would say, “Go ahead and do what you like because there are all different ways you can be helpful in this industry and it will probably work out.” I don’t know many people who’ve done a startup in this business who aren’t still around, if they put any effort into it, and are earning a perfectly good living. I think sometimes it’s deceptive that we don’t have that Uber disruptor like an Uber or like a Google or like a Facebook. There just isn’t that big force. But what is so energizing about this industry is that everybody does well, every RIA does well.

Brooke: Even every broker does well. If you’re willing to get in there and do it, chances are, “Now, why is that, right?” Again, it comes back to supply and demand. There seems to be an infinite demand for anything that will give the consumer a better relationship to their money. You see it with endless freaking credit card this, credit card that, loans this, loans that. But it’s just certainly at an elevated level when you’re talking about planning or planning a life, planning your life around your money, planning your relationship to your money. Money matters zero, and it matters 100%. We all think that way. It’s adviser, it’s that agent between you and your money. Anyway, that’s too philosophical, but I think I’d actually be misleading if I said, “Well, you should go into-”

Steve: A particular part of it. Okay, so opportunities everywhere and just it’s back to the capacity shortage. There’s a huge opportunity to educate people, have them have a better relationship, understand and control their money better in a huge way. I also totally agree with you that it’s what’s interesting about the financial services space and one of our CLO, Dave Robison, was like, “Things in financial services take like 20 years to play out.” I think that’s right. When you look at longer, Vanguard did change the industry through driving down fees first and funds, and that’s a rippling through and that awareness is rippling through the whole ecosystem, and that has taken 30, 40 years. They’ve created the index fund and everything else.

Steve: But it’s also interesting to watch. There’s so much investment and there’s been recent changes, there’s Robinhood and free trading, which has absolutely blown up. There’s crypto, there’s the people on Reddit that are outfoxing their hedge fund guys and trapping them in their own shorting strategies. It’s incredible to watch some of this stuff. Some of those things it’s change comes gradually, and then suddenly and it feels like, “Okay, maybe some of this stuff is actually we’re hitting critical mass.” At least, they’re seeing, just because of the internet and everything else, they have access to a huge amount of information and they’re bringing that to bear. Maybe we’ll see some massive changes play out here over the next five, 10 years.

Brooke: Well, I don’t even think anybody has a theory of what happens to the Reddit investor. But is there just some brute force of Robinhood bringing somebody into investing that somehow will translate into a larger number of investors? I don’t know what the number of people, percentage of people in America who even own a stock I? But when I’ve heard that number in the past, it’s been fairly low. But I think once people do, they tend to keep owning them, and that’s the big… There’s still just a belief that you can lose all your money in the stock market. Part of being an advisor is just to let people know, “Yes, the market is risky, but it’s so much riskier not to be in it.” That’s a really hard concept to communicate.

Brooke: Again, it gets back to why advisors are so valuable. I always wondered as a kid, is that even as a kid, I was aware that a stock broker had a bit of a stigma to put it nicely. Because I’d just hear my parents talk about it. But I always, “Then why did they make so much money?” It’s because they at least get you into stocks, so that’s a huge value add just to get somebody from having cash and bicycles to being in the market, to owning companies.

Steve: A couple of thoughts on these topics. One is when you look at somebody, there are two sources, big sources, stores of wealth, or their human capital when you just come out. If you’re not born wealthy, you get educated and you have this earning capacity and you go out and you make money. You turn that into capital or your net worth and houses and investments and savings. But your human capital, there’s really no friction. You get a job, you get paid, government takes their taxes. There’s benefits and stuff like that, but there’s not like… Essentially, you want me to look at the advisors. If they’re sitting between you and your total net worth and taking a 1% strip on it, this is like a tax that’s out there.

Steve: There is value like we talked about before, but one of the… to answer the question about why they have so much money is because, yeah, they’re sitting there riding herd on this giant like half of your capital, right? As, especially, as you age, your capital shifts from your human capital to your net worth. That’s one way to look at it. I think another thought I had when we were talking about the whole Reddit investor is if you zoom back from us and what we just talked about, hey, people, originally, it was about trading, like individual stocks. We learned to trade and then we became investors. We’re like, “Okay, let’s not just trade in and out of stocks and day trade and try and make flip this or that. But we’re going to invest in index funds or industries and have a more strategic look at this.”

Steve: I would definitely say there’s difference between being an investor, I mean, sorry, being a trader and an investor. One hopeful way of looking at what’s happening with the Reddit folks and younger folks that get into it is they’re trading, but they’re learning through trading. You will learn a lot, like you start making money and you start losing a ton of it, you’re learning fast. Then you might say, “Oh, what’s the mathematical better way to make money?” Well, it’s to become a strategic investor, have low fees, broadly invest. It’s a much more, you may not make as much, you won’t lose as much, but the probability of success goes up by a ton. If you start pressuring yourself, “Well, I just want to have a higher chance of success, and I don’t necessarily want to shoot to make 10 million or whatever the number is.”

Steve: Then you can shift from that trading mentality to the investment mentality, and maybe that’ll happen quickly because everything happens more quickly these days. Maybe that’ll be good for the investor base and the overall pool of people doing this.

Brooke: Right, but I assume that in the spectrum of human nature, one thing that will never evolve is people’s need for quick thrill. I think people have always sought that through investing, and I think a lot of brokers got into it because they wanted to be in that atmosphere. I think these, if you’re in a COVID atmosphere, everybody I know is a little bored and looking for a type of stimulation that they have lost by being cooped up. Oh my God, all of a sudden, I can be a Wall Street player here in my garage. On the call two days ago. He was talking about how they have to up capacity to deal with this Robinhood effect. But at the same time, he said, “We do, as a strategic matter, see it as temporary mania.” He didn’t use those words, but I think that’s what he said. We don’t want to build too much capacity.

Steve: It’s a great insight that, I mean, especially when you’re younger, you have a much more, a much higher capacity for risk. There’s more thrill seeking, and yeah, I traded options. I’ve done that kind of stuff. I’ve traded foreign exchange. I remember when I first learned that, “Oh, yeah, you can get 100 to 1 leverage on your money. It’s ridiculous.” It’s like totally gambling. Robinhood is like it’s free, free to make trades. It’s gamified. I think one thing people have to bear in mind is if something is free, you are the product, and I think that’s been proven to be true where, “Hey, these guys are paid by somebody, institutions, for order flow and visibility probably on what people are planning to trade.

Steve: What happens when everyone is trying to invest or trade at a GameStop? The institutions are getting crushed. Well, suddenly, they couldn’t trade it. Why did that happen? I think people have to bear that in mind is like you’re building your wealth on a platform where you’re not getting charged at all, then there can be misalignment. So something to watch out for.

Brooke: Well, it is ironic that these institutions are getting crushed as if somehow they weren’t drawn into it in the first place, by greed. It’s just one greedy subset versus another. Robinhood in the middle greedily facilitating it all.

Steve: Well, it’s interesting reading some of the analysis that is happening on these message boards, and it’s no joke. These folks are looking into the float in these stocks, the short positions analyzing and saying, “Hey, the reality is, in this scenario, they’ve oversold, they’ve overshorted this thing.” If we create enough purchasing momentum here, it’s going to force their hand and that’s what happened. The fact that they sucked out what four and a half billion dollars out of one hedge fund in a couple of days, the scale of it is tremendous and the power of these folks. Then people were saying, “Oh, it’s illegal.” Well, they’re not backroom whispering, they’re just talking about it openly and saying, “Hey, here’s the analysis. I think this is going to happen. If we do this, it’s math.”

Steve: Then they start doing it, and then the math works out. Now, getting everyone sucked into it and people buying at the top, what they don’t recognize is that it’s going to come back. It’s not like it’s going to go straight up and then people are also getting crushed. I’m sure young adults are getting hammered or older adults are getting hammered on this stock as well. Because the GameStop came straight back down, unsurprisingly.

Brooke: Yeah, no, it’s a giant Ponzi scheme they built against themselves, but they’re just hoping that somehow they’re smart enough to get out at the right moment.

Steve: Well, let’s say that the greater full lesson is going to be learned by a lot of people. All right, anything else you want to touch on? In terms of AI or big data, anything else that you see in terms of the future?

Brooke: Yeah, I still think we’re waiting to see on AI and big data. If AI is affecting my life in this industry, I’m not aware of it yet. I guess I would say the same thing for big data. Certainly, it doesn’t mean I don’t think they’re going to have a big influence at some point, but I don’t know, I’m not feeling it. Because how do you apply them? Where exactly are the applications? I think we’ve re recently written about Vice, and they, in theory, are going to solve the unsolvable problem of basically automating in RIA’s practice without taking away their control. I don’t know if that works. I can’t tell, but they’re putting their own money behind it, so all the power to them. Big data, we hear about Yodlee and what’s the company that Visa just tried to buy?

Steve: Plaid.

Brooke: Plaid, and supposedly they have a data advantage, but where is it played out exactly?

Steve: Yeah, I think on the AI side, it’ll be interesting. For what we’re doing, we’re looking at the behavior of hundreds of thousands of planners now and trying to essentially run lots of simulations behind the scenes. That’s where we’re headed, so that we can hopefully make better predictions about what could work. Then we don’t want to take control away from the consumer, it’s really just present them with, “Hey, it looks like if you did this series of Roth conversions, that’s something we just rolled out.” But we’re going to be doing this across the board like, “Here’s things you should consider for Social Security or for your portfolio or your location, asset location, for your taxation strategy. Maybe some of the things, same things that Vice is doing, but, yeah, we’ll see.

Steve: I think it’s AI will be interesting because until it works, it’ll be just like,, “Eh, interesting.” But if Tesla makes self-driving cars work in a big way, that’s going to change the world because no one will have to spend time driving and they can fetch cars and the changes, and you don’t need to keep cars because I could send for one right now. AI and other places, same thing, is it starts to automate a lot of small decisions or create a lot of optimizations. You could see efficiency gains in every industry.

Brooke: Right. I’m fairly opinionated, but I’m not opinionated about that because I haven’t gotten my mind around it. But I am pretty sure AI cannot replace an advisor because people are too crazy for even computers to understand.

Steve: That’s right. Human advisors aren’t going anywhere. People like talking to other people. There’s the emotional connection, the trust, the understanding of the whole situation. I do think that the transparency is going to go up. The cost structures are going to come under some pressure, or at least if there’s transparency, people will know that, “Hey, I have $2 million. If I’m paying you 1%, that’s 20,000 a year.” As long as they’re aware of that cost, and they’re like, “And that’s a good trade for me,” then great. If it’s like, “Well, maybe this would be fair, 10,000, maybe you’ll see some discussion on these.” For yourself, as you look forward, any big things that you’re planning on in the next year, 2021 comes, or the next couple of years?

Brooke: Well, that’s actually a hard question, but I would say that our thesis from the beginning is that we are focused on our RIAs which only we even know how to define and write to. We know the value of story, and it is so hard to both get all the information people need and then put it in the form of a story so that it will actually penetrate somebody’s thinking. We love the position we’re in. I hope AI does come along so that I can hire some AI to write some of my articles. But I like the fact that the barriers to entry to what we do are pretty astronomical. I’m incredibly grateful at the end of this year that I didn’t get sick. My business did not go out of business, in fact, it grew more than it ever has, and that we still have a democracy.

Steve: Yeah, right. Exactly. Yeah, no, it’s amazing that hopefully we’re coming through 2020 and things look brighter. For RIABiz, I’m a reader and I will say I get a lot of insight. It’s just pretty interesting hearing, “Hey, what,” on one hand, “what is Schwab and Fidelity thinking about? What is the local or the smaller advisor thinking about? What’s happened with all the technology?” You cover a lot of different things and also compliance. It’s good to see the ecosystem of the wealth space and how it’s evolving, so I found it pretty useful, and the writing was great. Even though you’re sitting across me, I wouldn’t say that unless I meant it.

Brooke: Well, thank you.

Steve: I was reading it today. Awesome.

Brooke: Well, I appreciate.

Steve: For our audience, retail investors mostly, any resources that you think that you like that you think they might find valuable in terms of online sites or writers or?

Brooke: Well, it’s funny because I just had an old friend call me because she was trying to decide whether to fire her UBS broker, who everybody had advised was ripping her off, and he had just moved to Ameriprise. Some of the things she liked about UBS, they didn’t have at Ameriprise, etc., which related to banking. After our entire conversation about this thing, we concluded that she should stay with that advisor. It just came down to the fact she had a certain rapport, she thought he said a lot of really stupid things, but that she knew when he was saying stupid things and when he wasn’t.

Brooke: I do think, as a consumer, you just need to have your eyes open no matter what advisers work for you, the tools work for you, the resources. But use the resources, use Google, go through the motions, do the old-fashioned ask for some references. It’s never going to be good if you don’t put a little energy into it yourself. If you love to invest, then be a self-directed investor. Because maybe that thrill or that satisfaction or whatever it might be, know that about yourself. Because we’re all on the spectrum of needing thrills and not needing thrills. I think that’s the silver bullet is elusive, and when I give advice to friends, I find I give a spectrum of advice based on their personality.

Steve: Yeah, so you have to know yourself and it also is what caveat you have to be a buyer beware.

Brooke: You have to be a buyer beware.

Steve: Yeah, right, in this space. All right. Well, good. Brooke, thanks for being on our show, and Davorin Robison, thanks for being our sound engineer behind the scenes. Everyone, thanks for listening. Hopefully, you found this useful. Our goal at NewRetirement is to help anyone plan and manage their retirement so they can make the most of their money in time. If you made it this far, definitely check out Brooke’s work at RIABiz.com. You can find us at newretirement.com and we have a private Facebook group, which is actually getting really active now, it’s like 2,500 people growing very fast. Lots of discussion of these kinds of topics.

Steve: In fact, we had a big discussion about advisors and fees that’s going on right now. That’s it. Last thing is we are trying to build the audience for this podcast, so any sharing or any reviews online at iTunes or Stitcher or anywhere are highly appreciated. With that, thanks again and have a great day.

Brooke: Thank you, Steve.

NewRetirement Planner

Do it yourself retirement planning: easy, comprehensive, reliable

NewRetirement Planner

Take financial wellness into your own hands and do it yourself retirement planning: easy, comprehensive, reliable.

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