August 2019 — Oblivious Investor

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.

August 19, 2019

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:

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

Retiring Soon? Pick Up a Copy of My Book: