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Working as an Advisor at Edward Jones: Ethical Qualms

A reader writes in, asking:

“You have mentioned a few times that you were a financial advisor with Edward Jones early in your career. My oldest child will be graduating in May next year, and a local Jones advisor/manager is trying to recruit her to come on board as an advisor after graduation.

I am aware that they still use the old-school commission type of compensation for their advisors, which is often not the best from the client’s point of view. But what I am most interested in knowing is whether you were ever asked to do anything that felt like it was against the client’s interests, or were you generally free to operate as you saw fit, according to your own ethics and best practices.”

A relevant point here is that I worked at Edward Jones for just under a year, and I was 21-22 at the time. So while there is still quite a bit about financial planning that I don’t know, it’s safe to say that I knew much less back then. Point being, there were an assortment of things that they told us to do, which I now realize were less than ideal, but which I just accepted at the time because I didn’t yet know any better.

But, yes, there was one instance that really made me uncomfortable, even with my very limited knowledge.

Immediately after we got our licenses, we were brought back in for a week of sales training at the home office. During that week, two of the days were spent making phone calls to prospective clients whom we had met over the last few months, in order to pitch them an investment product.

We didn’t get to choose the product. On the first day we had to pitch an individual bond. We could choose between a corporate bond (one from General Electric) or an AAA-rated muni bond from the state in which the client lived. I went with the muni bond. I knew it wouldn’t be ideal for plenty of the people I was calling (after all, I had no idea about their tax situation or about the rest of their portfolio), but at least it wasn’t likely to blow up on them.

On the following day, we had to pitch an individual stock. Even back then, I wasn’t at all on board with the idea of selling somebody an individual stock, especially while knowing almost nothing about the person in question. If they put, say, $20,000 into this stock, is that a trivial amount for them? Or are they going to be in a serious predicament if the stock goes south?

In addition, we had a supervisor listening in on the phone call, without the prospect’s knowledge. And we were in a loud room, full of people making similar calls. It was about as far as away from financial planning as you can get.

I remember making a point of calling all my worst prospects (that is, people who I knew were very unlikely to become clients), calling the same numbers repeatedly over the course of the day (i.e., calling people who weren’t home 20 minutes ago, in the hope that that would still not be home now), and intentionally flubbing my sales pitch when I did actually get a hold of somebody.

My plan was to just make it through those two days, then go back to my office in Chicago and run things in a way with which I was more comfortable: constructing diversified mutual fund portfolios. (In fact, this course of action was explicitly recommended to me by the manager in the Chicago region where I was working. Even as a long-term Edward Jones broker — somebody very comfortable with a sales/commission type of advisory role — he thought that the home office’s boiler room-style sales training was terrible for both clients and advisors.)

This was ~13 years ago, so I don’t know in what ways their training process has or hasn’t changed since then. Nonetheless, Edward Jones’ business model is still based on fundamental conflicts of interest between the client and the advisor, and I would not recommend it as a place to work as an advisor (nor as a place to invest as a client).

If at all possible, for a recent graduate interested in working in financial planning, I would instead suggest Michael Kitces’ approach of trying to get a position not as a financial advisor but rather in an operations/support role at a financial advisory firm with a good reputation and client-centric business model. Any place that will hire people as full-fledged advisors right out of undergrad (and with no certifications) is almost certainly going to be employing those people in a product-focused sales role rather than actual financial planning.

Brief tangent: as it happens, the two stocks were Coca Cola and Bank of America. This was in April of 2006. Coca Cola has done great over the period — considerably outperforming the market overall. Bank of America, on the other hand, is down roughly 20% over the entire period, and it had a truly harrowing crash during the 2008-2009 bear market — at one point having declined by more than 90% (!!) from the April 2006 purchase price. Good example of the risk of individual stocks.

Investing Blog Roundup: CFP Directory Not Disclosing Disciplinary Information

There’s been something of a hullabaloo in the last two weeks as a result of a WSJ article about the LetsMakeAPlan website (a directory of financial planners, run by the CFP Board). The WSJ found that the website often does not disclose information about a CFP’s history of discipline by regulatory bodies or history of bankruptcy, even though they have access to such information.

Here’s what the WSJ found:

“The LetsMakeAPlan.org site has been presenting more than 6,300 planners without showing such problems even though the planners have disclosed them to the Financial Industry Regulatory Authority, according to a Wall Street Journal analysis of more than 72,000 profiles on the website.”

Retirement Income Style Awareness Survey

As a separate point of note, retirement researcher Wade Pfau wrote this week about a survey/questionnaire that his firm is working on.

The idea is that it will help people to determine the best personal approach for them to take for retirement income planning.

At this stage they are looking to have about 1,000 people in total take the survey to help determine which questions provide the best explanatory power for helping to define a style in order to make the final version of the survey.

If you’d like to participate, you can find the survey here.

Pfau told me that participants will be able to get results in the Fall once all of the analytics have been worked out. (This is why the survey asks you to create an account — so that you can get your results once everything on the backend has been completed.)

Other Recommended Reading

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Getting out of the Market in Retirement?

A reader writes in, asking:

“An acquaintance emailed recently to ask input on her portfolio. She said her ultimate goal is to get out of the stock market. This woman and her husband are both retired and in their early 70s I think, with no extreme wealth. I assume they are comfortable enough but live simply and likely need to watch expenses.

When I asked what her concerns were about the market, she replied ‘political objections, volatility, ignorance..lack of control..risk aversion..Would consider investing in something I could believe in..’

Can you point me to any resources (articles, books, charts) that clearly explain why getting out of the market probably isn’t a good idea?

Any thoughts about how to respond to something like this?”

The idea of getting in and out of the stock market necessitates a belief that the market is predictable in the short-term. And it is not.

People are always looking for ways to predict short-term market movements — a reliable such method is basically the holy grail of investing. Of course, nobody ever finds it. For example, here is a well known study that looked at over 5,000 different trading rules and found that they “do not add value beyond what may be expected by chance.”

The best stock market =\]predictor I am aware of is the concept of valuations (which can be measured in an assortment of related ways). It’s useful (though not at all perfect) for longer-term predictions, but essentially useless for short-term predictions. Here’s a recent article from Larry Swedroe on that topic.

But a separate question is whether a retiree might want to permanently get out of the stock market (i.e., not attempting to move back and forth between stocks and bonds at advantageous times, but rather simply electing to have a permanent 0% allocation to stocks).

And that isn’t necessarily such a bad idea, depending on circumstances. Many experts think it’s entirely reasonable (wise even) to prioritize building a sufficient pool of safe assets to fund retirement before allocating any part of a retirement-stage portfolio to stocks.

For example, the following two quotes come from Bill Bernstein’s book The Ages of the Investor.

“As one approaches the end of one’s human capital and hopefully has accumulated enough investment capital to safely offset the expense of retirement living, it makes little sense to put at risk the funds earmarked for retirement living expenses. In other words, once the game has been won by accumulating enough safe assets to retire on, it makes little sense to keep playing it, at least with the ‘number’: the pile of safe assets sufficient to directly provide or indirectly purchase an adequate lifetime income stream.”

“If, at any point, a bull market pushes your portfolio over the LMP [liability matching portfolio] ‘magic number’ of 20 to 25 times your annual cash-flow needs beyond Social Security and pensions, you’ve won the investing game. Why keep playing? Start bailing. After you’ve put enough TIPS, plain vanilla Treasuries, and CDs into your mental LMP, you’re free to start adding again to your RP [risk portfolio].”

Or as many people have quoted him since: “if you’ve won the game, why keep playing?”

When comparing various stock/bond allocations, this 2015 paper/article from Wade Pfau may be of interest. In that paper, we can see that once we look at horizons greater than 20 years, it becomes clear that having some stocks is helpful relative to an all-bond portfolio, in the sense that those stocks will reduce the likelihood of running out of money.

But there are important caveats:

  • Probability of portfolio depletion is not the only relevant metric here. In the failure scenarios, we don’t just care that a failure occurred (i.e., portfolio was depleted), we want to know when it occurred. That is, in the scenarios in which the portfolio is depleted prior to death, it makes a big difference to the retiree whether the depletion occurred 15 years into retirement or 25 years into retirement. And a risky allocation can result in depleting the portfolio sooner than would be the case with a super safe allocation.
  • If the goal is just to maximize spending over their lifetimes in as safe a way as possible, a boring (likely inflation-adjusted) joint lifetime annuity is probably the best tool for the job rather than stocks.

With regard to that first caveat, this paper from Joe Tomlinson may be of interest.

Key questions that could help determine how much of their portfolio should be annuitized (and how to allocate the non-annuitized portfolio) would be:

  1. What type of health are they in (i.e., what type of planning horizon is necessary)?
  2. How much (what percentage of the portfolio) is the couple hoping to spend per year?
  3. How flexible is the answer to #2?
  4. How strong is their “bequest motive” (i.e., desire to leave behind money to heirs)?

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Investing Blog Roundup: Preparing for the Possibility of Cognitive Decline

One concern I know many readers here share is the possibility of diminished cognitive ability as they age. Many of you who are already retired have mentioned to me that you have opted to simplify your portfolios (in some cases switching to an all-in-one fund). And some of you have mentioned such concerns as one of the reasons you chose to delay Social Security and/or purchase an annuity.

This week we have an article from CPA/CFP Jeffrey Levine, walking you through the basic options for different types of accounts/documents that can allow your family members to help manage your finances, in the event that you do end up needing such help.

Other Recommended Reading

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The Effect of Taxes on the Social Security Filing Decision

A reader writes in, asking:

“Could you write something explaining the effects of taxes on the age you decide to begin Social Security. Especially since RMD’s may be delayed to age 72 under new legislation. Also, my state doesn’t tax Soc. Sec. benefits. Thanks.”

In most cases I have looked at, tax planning has worked out to be a point in favor of delaying.

The mechanism at work is that Social Security is, at most, 85% taxable. In contrast, distributions from tax-deferred accounts are usually fully taxable. And spending down your tax-deferred accounts in order to delay Social Security has the effect of increasing the portion of your lifetime income that is made up of (not-fully-taxable) Social Security and decreasing the portion of your lifetime income that is made up of (usually-fully-taxable) distributions.

And a similar thing is usually going on at the state income tax level. Only 13 states tax Social Security benefits, whereas a majority of states treat distributions from tax-deferred accounts as taxable income.

But, to be clear, the effect of taxes on the Social Security decision is very case-by-case. While the above effect is pretty broadly applicable, there could be any number of other factors that could point in the other direction. Almost anything that appears on a person’s 1040 could end up being a relevant factor in the analysis.

Ideally, the way to do the analysis (e.g., when comparing two possible claiming strategies) is to:

  1. Use tax prep software (or other similarly fully featured tax planning software) to estimate the total household tax bill year-by-year under each claiming strategy that you want to test. (For a married couple, you actually want to estimate 3 different tax costs for each year for each claiming strategy: a scenario in which both people are alive, one in which only Spouse A is alive, and one in which only Spouse B is alive.)
  2. Do a typical net present value calculation for each strategy, including the differences in tax costs as cash flows. For example, if you are comparing two strategies, and Strategy 2 has higher taxes by $1,000 in a given year, include that as a $1,000 negative cash flow for Strategy 2 that year. (Again, for a married couple, you would be doing three calculations for each year for each strategy — both spouses alive, only A alive, only B alive — then weighting each one by its probability, using a mortality table of your choosing.)

With regard to step #1, I would caution against using a spreadsheet or other similar DIY tax calculation. It’s very easy to accidentally fail to include a given credit/deduction/exclusion that would affect the analysis — especially when we consider state income taxes as well.

And of course it’s important to remember that all of this is just a projection. There are many unknowable factors involved.

Tangential note: my spreadsheet for doing step #2 of this analysis is what originally served as the starting point for the Open Social Security calculator. And it’s part of why I was surprised to realize that most (all?) other Social Security claiming calculators use a fixed life expectancy assumption in the calculation (i.e., assuming with 100% certainty that a person dies on a given date). Doing so is fine for an unmarried person, but for a married couple it significantly underestimates the length of time for which only one spouse will be alive. That really messes with the value of survivor and spousal benefits, and it also really messes up the expected tax cost calculation (because taxes change significantly once one spouse dies).

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  • How Social Security benefits are taxed and how that affects tax planning,
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Investing Blog Roundup: Taxes Made Simple, 2019

The 2019 editions of Taxes Made Simple and my book about taxes for sole proprietors are both now available. In contrast to the major changes that were necessary from 2017 to 2018 (due to the new tax law), the changes from 2018 to 2019 were relatively modest — inflation adjustments to various figures, minor improvements to wording here and there, etc.

Recommended Reading

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My new Social Security calculator (beta): Open Social Security